Niall Ferguson -Historian HARDtalk

why particles have mass. Now on BBC News, it is time for

HARDtalk. The British Government has promised

action to deal with the scandal at Barclays. The bank has been fined

for trying to fix the interest rate at which banks lend to each other.

Yet again it is the lack of regulation that is being blamed for

a financial problem. My guess today argues that the world is responding

in the wrong way to the global financial crisis. He is Professor

Niall Ferguson, and he thinks the economic chaos was caused by too

much regulation, not too little. Welcome to HARDtalk. When you see

what Barclays was up to, trying to manipulate the interbank rate,

surely the answer do that is more regulation. I am quite interested

to know what kind of regulation could be devised to ball into the

minds of traders, at all the banks, in the City of London, subject them

to some kind of lie detection test, and make sure that when

representatives of the Bank meet to set LIBOR rent -- lending rates,

they told the truth, the whole truth. It would be pretty hard to

come up with that regulation. It is highly desirable that they tell the

truth, and the fact that they did not is to be condemned, but I think

the point that I made in my lectures, is that imagine if you

can solve problems like that, with complex regulations, it is an

illusion. We will come up to the arguments that you made. On the

question of what happened at Barclay's, and from what we

understand has probably happened at other banks, the FSA find Barclays.

But it did not feel it had the power to prosecute. That is

something the Chancellor says will be changing. It is far from clear

that what happened could testify a criminal prosecution under the law

that existed. So a new law is needed to deal with that. That is

not to say that there was not a regulation of the interbank lending

market, it there was. The issue is highly technical, which we need to

take some time to discuss. The London interbank rate is set, in

this case, representatives of 16 banks, who then say when they meet,

that what they think their bank would be able to borrow money at,

from another bank, on the day in question. They then take these

estimates... you have to understand how complex this is, they take the

16 estimates, they cut off the top ones and the bottom ones, and they

take the average of the middle ones. That is the rate that appears. That

is what the Barclay's representatives were trying to fix.

The impact of police more sheets in the rate is the issue. -- pretty

small shifts. Because it is used as the basis for a lot of contracts,

it has an impact. But it is not a market rate. It is set in effect by

a committee. Given what we know by what happened at Barclays, they

were doing it to make money, and then it was to hide the fact they

appeared to be under financial stress. What we do know is they

have been fined, a lot of people look at this and say that is

bordering on criminal, what is going on. They should be prosecuted.

The intention is to introduce, whether it is legislation or not,

to change the rules so that in future, somebody could be

prosecuted. Is that something that you would welcome? We want to see

the truth told. As I said to you earlier, I am not entirely sure how

any regulation is going to ensure that. But if you know there is a

heavy penalty at the end of the process... there was a heavy

penalty already. The chief executive officer is gone, the

chairman has gone, the chief operating officer is gone. The

penalty in terms of their careers was already Severe. Whether there

is a criminal case to be made is not clear. Let's follow it through.

What is extremely hard to imagine is a regulation that can enforce

truth-telling when those representatives meet. The only

reason we know that they were not telling the whole truth is that

there were e-mails between traders. These emails were never be written

again. And that is because of what happened. You seem to be suggesting

that things were working OK. I do not think that is OK. The point I

am making is that you cannot devise a regulation that ensures that. Let

me try to pursue this point. It is a really important point. The

mistake we are making on dealing with the financial crisis, is that

imagining you can devise enormously detailed statutory provisions, or

what will emerge from the John Vickers report, which will prevent

the things that happened in the run-up to the crisis. That is not

realistic. These are highly unlikely to be prevented by a

regulation, no long -- no matter how long all wordy it is. What

happens in the next financial crisis will be quite different to

this one. We have to be realistic about what you can achieve that.

You have argued that less regulation, but enforceable

regulation, and this case seems to illustrate, we have seen the chief

executive lose his job, and the chief operating officer resigned,

but nobody has been prosecuted. This has only just come to light.

They may more walk away with huge sums. If you are to create a

penalty that acts as a deterrent, even in a very simple system, but

you put forward, surely cases like this need to be dealt with more

severely. What are you going to do? Are you going to pass an act

against telling fibs? What are you proposing? One of the things that

you have to learn about the financial system is that the crisis

we just saw happen in a relatively regulated market, which is the US

mortgage market, and the transatlantic banking system. There

was a whole host of regulatory bodies supposed to represent

malfeasance in those markets. The less regulated sectors, such as

hedge funds, were not the problem. Regulation itself does not prevent

financial crisis. Accept that. I am trying to move on to the penalties.

Let's be clear. Creating a more complex regulation, passing more

rules to deal with things that happen in the past were not

prevented the next financial crisis. We are making the next financial

crisis more likely by creating ever more complex regulatory frameworks.

That is happening not only in this country but in the US, but if you

look at Basle, where the next rating is happening, there is a new

set of complex regulations. What I'm not clear is what you are

therefore proposing should happen. It is hard, if you are talking

about the seating successful criminal prosecutions, it is

extremely hard to achieve this. The Serious Fraud Office has had a

terrible time trying to get convictions. In most recent events,

the things that lead up to and produce to the crisis, we did not

see a huge amount of fraudulent activity. Bernie Madoff is the

exception. What we saw was a very reckless activity, mismanagement of

banks such as Leman brothers... interruption is the BBC will, but

let meet the dish. -- let me finish. There is not some kind of magical

mechanism that you can create a day, that would create criminal offences

that do not currently exist, that will prevent the next financial

crisis. I understand why people feel enraged, I feel angry as well,

I explicitly said that there need to be some people sent to jail if

we are to have confidence in London and New York restored. But the

reality is that it is extremely hard to do. Most of the things that

produced the crisis were not fraud. What is your answer? I am accepting

your argument, no more layers, we are creating the next problem, so

if Professor Ferguson was devising the rules, if you were scaling back

what already exists, what would the regime look like and how could you

enforce it? In dividing the system between the Bank of England, the

financial regulator, and other smaller regulators, it has not

worked out well. The tripartite system that Gordon Brown introduced

as Chancellor has been a failure. What is happening that I approve of

his two -- is a division in the banking system, as used to be the

case. If you go back 100 years, for the person who wrote the book on

central banking, the Bank of England should be all-powerful, and

this is the Boyd that is always forgotten, the rules should not be

completely clear, they should not be spelled out. The discretion of

the government is the key source of discipline. I think that he's a

really important point. If we we run these events, let's go back to

2005, the Governor of the Bank of England had been able to haul him

Marcus Agius and Bob Diamond and say, we understand that some of you

chaps are not complete the playing by the rules, you need to do

something about that. It is that combination of power and discretion

which produces a good red glittery system, not 2000 pages of

legislation. SMAC Regula Torry system. What if they do not follow

through. Then the central bank should have the power to act.

is where it is so difficult. This is an all-powerful figure.

cannot operate if the bank decides to revoke your licence. That is the

power of the Bank of England. how do you prove that the trader

has transgressed at the boundaries. You need incredibly good evidence

if you are going to pursue criminal charges. That is not the object of

the exercise, much as we enjoy to imagine people behind bars. And the

financial market should operate in a way that is not unfair, does not

benefit insiders at the expense of outsiders, and this is really

important, the whole world should think that London is a place where

honour, the rule of law, are fundamental. In the days are bought

a badger, you were not dealing with global financial markets. London

was an international financial sector, like it was today. It was

an international financial sector precisely because the rest of the

world knew it was the best. Do you seriously envisage a world where

the Governor of the Bank of England is calling somebody in and say, I

he will mark there is a bit of dodgy dealing, and raises his

eyebrows at him, and that is going to work in today's world. I did not

see how else we are going to make the markets work. You cannot solve

the problem we are discussing with enormously complex regulation, and

criminal cases with the Serious Fraud Office desperately trying to

claim there was a fraud. You have to NPower be authority in such a

way that it way that itse discipline on the players. -- to NPower. These

things happen because the bank had been essentially rendered impotent

by losing supervisory power. Without the power, it was extremely

hard for anybody to bring discipline to the City of London.

The reputation of the City is the answer -- is the key issue. It

extended be on the market and beyond the British banks. We will

see revelations to that effect. We have been talking about the

arguments he put forward in a series of lectures which you have

just given and have been broadcast. One of the are other arguments in

make Borrie series of arguments is that a whole generation has broken

its deal with subsequent generations. It is in danger and

threatening to run just society because it is loaded debt. The

older generation now have basically spend too much and have mortgaged

the lives of future generations. Eddie have set out of the mind-

boggling figures which we have heard many times. It is

unsustainable. You paint a fairly bleak picture of the lack of a

route out of this. Maddy you see us getting out of this whole? It is

extremely difficult. If you add together the public and private

debt of the UK, it comes to around 500 % of gross domestic product.

There is only one society in history with a higher level of debt

to income. Japan. We are up there with Japan in terms of being the

most indebted country ever. A lot of that was generated by pants but

the other big part was government and household. -- generated by

banks. We sought to live beyond our means. Most people argue about this

debt in narrowly economic terms. This completely misses the point.

The real story is the huge liability that is being passed on

by our generation to the next. People who don't get to vote yet.

Kits and the unborn. This enormous debt burden will guarantee that

most Western economies grow very slowly and youth unemployment stays

very high. This is the shocking thing about the last two decades.

It is the breach of the social contract between generations. The

biggest challenge facing politicians now is to figure out

how to restore that before we end up with a completely alienated and

disillusioned and the generation who come into an inheritance of

debt. What will be the effect of that? I think they may revolt in a

way we have not seen before. Most of people assume they should be on

the left and are attracted to things like the occupied more --

Occupy movement. But what they may find they have to do is move to the

right and support those people who favour of radical reform of

entitlement systems, welfare systems and other systems that have

brought about this explosion in public debt. We may see in the next

ten years a shift of the young a wave the positions that were

typical of the young from the 1960s to about now. The young will say,

why on earth do we have to finance these astonishingly generous

pension schemes that have been created for our retiring parents or

grandparents? You said it can Americans knew what was good for

them, they would all be in the Tea Party? But that is not what is

happening now. They are on the left. That is not quite true. The young

do not exclusively break to the left. I'm struck by the fact that

the students I teach art somewhat to the right of the professors. The

shift is already happening and it will become more of an issue. It is

no coincidence that many of the politicians to most argue for

fiscal reform are relatively young politicians. Their argument for

austerity comes from and the politicians than it does from all

the politicians. I think a shift is happening. But the government did

not have the support. It had to be in coalition to be in power. That

may not be the case in a few years. The parties up pointing opposite

ways. D think it is not called to be right wing and that is the

problem? It may not be cool but it is better to be right than cooler.

But is it all the money better to win the argument? I wonder if you

think that the Tea Party should be focused on rebranding. The argument

has been one. President Obama had to abandon his position on fiscal

policy and accept there would need to be reform. That is why the car

may have the US moving rapidly towards drastic changes in fiscal

policy at the end of this year. He argued there was no problem. The

budgets the White House produced were completely fictional. Paul

Ryan called him out on this and he finally came around last year. He

did not have the nerve to endorse a programme for fiscal reform.

argument is not overran France or Greece. It is every Greece and it

will be over in France in a few weeks. You can't carry on borrowing.

It is over. That age of debt has come to an end. It ended in Greece

first. There was the talk of some kind of default. But it was not

credible. Francois: Came in promising credible things like

Lobbe retirement ages and an increase in public provision for

teaching. This will be gone in a matter of weeks because it is not

viable. Governments have borrowed to the max. They have reached the

point many households have reached Obama administration start their

credit cards. But you have made another argument that there is no

impetus for change because look at the politics and governments which

are supporting people. People will not get rid of the government.

point I tried to make is that given it is not sustainable, either we

try to reform our broken system of public finance with strong

leadership, or it will be reformed forcibly by our inability to raise

money to finance our deficits. That is essentially what happened in

southern Europe over the last two years. But you can't borrow any

more, it -- reforms tend to be imposed at the worst possible time

and with the most about of pain. It is better to get ahead of the curve.

I think this government has been trying to do that in this country.

He did not smart at the suggestion of the right wing but you do hate

labels. But you are economically right wing, T you accept that?

being against the nationalisation of industry, against subsidies,

bloated public sector, protection, if all of these things make me

Conservative, so be it. But in the British media, it is a term of

abuse designed to undermine an argument. The arguments I'm making

are not arguments for fat-cats. Something more has to be done to

discipline the bankers. The arguments are for the young who are

currently being screwed to use a technical term. If you really

believe in a young people and people from low income families and

what to see them had a chance of employment and social mobility, you

may find yourself having to believe some things that you previously

thought the right wing and conservative. You say that right

wing is a term of abuse here. You have moved to the US and are

clearly happier there and in the UK. You have said that excessive the

immense is your greatest weakness. The English hate that but at the

Americans love that. That's true. The British hate that? The English

don't like it? The English don't like to the Scotsman. That is a

reality that goes back to James the 6th. It is so depressing that you

can't make an academic argument will feel that you can be heard in

the UK. I can be heard but the question is whether I could have