:00:03. > :00:12.why particles have mass. Now on BBC News, it is time for
:00:12. > :00:17.HARDtalk. The British Government has promised
:00:17. > :00:20.action to deal with the scandal at Barclays. The bank has been fined
:00:20. > :00:25.for trying to fix the interest rate at which banks lend to each other.
:00:25. > :00:29.Yet again it is the lack of regulation that is being blamed for
:00:29. > :00:34.a financial problem. My guess today argues that the world is responding
:00:34. > :00:38.in the wrong way to the global financial crisis. He is Professor
:00:38. > :00:48.Niall Ferguson, and he thinks the economic chaos was caused by too
:00:48. > :01:11.
:01:11. > :01:15.much regulation, not too little. Welcome to HARDtalk. When you see
:01:15. > :01:21.what Barclays was up to, trying to manipulate the interbank rate,
:01:21. > :01:25.surely the answer do that is more regulation. I am quite interested
:01:25. > :01:31.to know what kind of regulation could be devised to ball into the
:01:31. > :01:36.minds of traders, at all the banks, in the City of London, subject them
:01:36. > :01:42.to some kind of lie detection test, and make sure that when
:01:42. > :01:47.representatives of the Bank meet to set LIBOR rent -- lending rates,
:01:47. > :01:50.they told the truth, the whole truth. It would be pretty hard to
:01:50. > :01:56.come up with that regulation. It is highly desirable that they tell the
:01:56. > :02:00.truth, and the fact that they did not is to be condemned, but I think
:02:00. > :02:04.the point that I made in my lectures, is that imagine if you
:02:04. > :02:09.can solve problems like that, with complex regulations, it is an
:02:09. > :02:12.illusion. We will come up to the arguments that you made. On the
:02:12. > :02:18.question of what happened at Barclay's, and from what we
:02:18. > :02:23.understand has probably happened at other banks, the FSA find Barclays.
:02:23. > :02:29.But it did not feel it had the power to prosecute. That is
:02:29. > :02:35.something the Chancellor says will be changing. It is far from clear
:02:35. > :02:41.that what happened could testify a criminal prosecution under the law
:02:41. > :02:45.that existed. So a new law is needed to deal with that. That is
:02:45. > :02:50.not to say that there was not a regulation of the interbank lending
:02:50. > :02:56.market, it there was. The issue is highly technical, which we need to
:02:56. > :03:03.take some time to discuss. The London interbank rate is set, in
:03:03. > :03:07.this case, representatives of 16 banks, who then say when they meet,
:03:07. > :03:14.that what they think their bank would be able to borrow money at,
:03:14. > :03:19.from another bank, on the day in question. They then take these
:03:19. > :03:23.estimates... you have to understand how complex this is, they take the
:03:23. > :03:30.16 estimates, they cut off the top ones and the bottom ones, and they
:03:30. > :03:35.take the average of the middle ones. That is the rate that appears. That
:03:35. > :03:42.is what the Barclay's representatives were trying to fix.
:03:42. > :03:47.The impact of police more sheets in the rate is the issue. -- pretty
:03:47. > :03:52.small shifts. Because it is used as the basis for a lot of contracts,
:03:52. > :03:57.it has an impact. But it is not a market rate. It is set in effect by
:03:57. > :04:02.a committee. Given what we know by what happened at Barclays, they
:04:02. > :04:06.were doing it to make money, and then it was to hide the fact they
:04:06. > :04:10.appeared to be under financial stress. What we do know is they
:04:10. > :04:16.have been fined, a lot of people look at this and say that is
:04:16. > :04:21.bordering on criminal, what is going on. They should be prosecuted.
:04:21. > :04:25.The intention is to introduce, whether it is legislation or not,
:04:25. > :04:32.to change the rules so that in future, somebody could be
:04:32. > :04:37.prosecuted. Is that something that you would welcome? We want to see
:04:37. > :04:44.the truth told. As I said to you earlier, I am not entirely sure how
:04:44. > :04:48.any regulation is going to ensure that. But if you know there is a
:04:48. > :04:52.heavy penalty at the end of the process... there was a heavy
:04:52. > :04:57.penalty already. The chief executive officer is gone, the
:04:57. > :05:01.chairman has gone, the chief operating officer is gone. The
:05:01. > :05:06.penalty in terms of their careers was already Severe. Whether there
:05:07. > :05:12.is a criminal case to be made is not clear. Let's follow it through.
:05:12. > :05:15.What is extremely hard to imagine is a regulation that can enforce
:05:15. > :05:19.truth-telling when those representatives meet. The only
:05:19. > :05:23.reason we know that they were not telling the whole truth is that
:05:23. > :05:30.there were e-mails between traders. These emails were never be written
:05:30. > :05:37.again. And that is because of what happened. You seem to be suggesting
:05:37. > :05:45.that things were working OK. I do not think that is OK. The point I
:05:45. > :05:51.am making is that you cannot devise a regulation that ensures that. Let
:05:51. > :05:56.me try to pursue this point. It is a really important point. The
:05:56. > :06:03.mistake we are making on dealing with the financial crisis, is that
:06:03. > :06:07.imagining you can devise enormously detailed statutory provisions, or
:06:07. > :06:11.what will emerge from the John Vickers report, which will prevent
:06:12. > :06:16.the things that happened in the run-up to the crisis. That is not
:06:17. > :06:21.realistic. These are highly unlikely to be prevented by a
:06:21. > :06:24.regulation, no long -- no matter how long all wordy it is. What
:06:24. > :06:32.happens in the next financial crisis will be quite different to
:06:33. > :06:37.this one. We have to be realistic about what you can achieve that.
:06:37. > :06:41.You have argued that less regulation, but enforceable
:06:41. > :06:45.regulation, and this case seems to illustrate, we have seen the chief
:06:45. > :06:53.executive lose his job, and the chief operating officer resigned,
:06:53. > :07:00.but nobody has been prosecuted. This has only just come to light.
:07:00. > :07:05.They may more walk away with huge sums. If you are to create a
:07:05. > :07:09.penalty that acts as a deterrent, even in a very simple system, but
:07:09. > :07:16.you put forward, surely cases like this need to be dealt with more
:07:16. > :07:22.severely. What are you going to do? Are you going to pass an act
:07:22. > :07:26.against telling fibs? What are you proposing? One of the things that
:07:26. > :07:32.you have to learn about the financial system is that the crisis
:07:32. > :07:37.we just saw happen in a relatively regulated market, which is the US
:07:37. > :07:41.mortgage market, and the transatlantic banking system. There
:07:41. > :07:45.was a whole host of regulatory bodies supposed to represent
:07:45. > :07:51.malfeasance in those markets. The less regulated sectors, such as
:07:51. > :07:59.hedge funds, were not the problem. Regulation itself does not prevent
:07:59. > :08:04.financial crisis. Accept that. I am trying to move on to the penalties.
:08:04. > :08:08.Let's be clear. Creating a more complex regulation, passing more
:08:08. > :08:14.rules to deal with things that happen in the past were not
:08:14. > :08:19.prevented the next financial crisis. We are making the next financial
:08:19. > :08:23.crisis more likely by creating ever more complex regulatory frameworks.
:08:23. > :08:27.That is happening not only in this country but in the US, but if you
:08:27. > :08:34.look at Basle, where the next rating is happening, there is a new
:08:34. > :08:42.set of complex regulations. What I'm not clear is what you are
:08:42. > :08:44.therefore proposing should happen. It is hard, if you are talking
:08:44. > :08:49.about the seating successful criminal prosecutions, it is
:08:49. > :08:53.extremely hard to achieve this. The Serious Fraud Office has had a
:08:53. > :08:57.terrible time trying to get convictions. In most recent events,
:08:57. > :09:02.the things that lead up to and produce to the crisis, we did not
:09:02. > :09:07.see a huge amount of fraudulent activity. Bernie Madoff is the
:09:07. > :09:16.exception. What we saw was a very reckless activity, mismanagement of
:09:16. > :09:24.banks such as Leman brothers... interruption is the BBC will, but
:09:24. > :09:28.let meet the dish. -- let me finish. There is not some kind of magical
:09:28. > :09:32.mechanism that you can create a day, that would create criminal offences
:09:32. > :09:38.that do not currently exist, that will prevent the next financial
:09:38. > :09:42.crisis. I understand why people feel enraged, I feel angry as well,
:09:42. > :09:47.I explicitly said that there need to be some people sent to jail if
:09:47. > :09:51.we are to have confidence in London and New York restored. But the
:09:51. > :09:59.reality is that it is extremely hard to do. Most of the things that
:09:59. > :10:05.produced the crisis were not fraud. What is your answer? I am accepting
:10:05. > :10:09.your argument, no more layers, we are creating the next problem, so
:10:09. > :10:13.if Professor Ferguson was devising the rules, if you were scaling back
:10:13. > :10:20.what already exists, what would the regime look like and how could you
:10:21. > :10:25.enforce it? In dividing the system between the Bank of England, the
:10:25. > :10:30.financial regulator, and other smaller regulators, it has not
:10:30. > :10:40.worked out well. The tripartite system that Gordon Brown introduced
:10:40. > :10:40.
:10:40. > :10:43.as Chancellor has been a failure. What is happening that I approve of
:10:44. > :10:49.his two -- is a division in the banking system, as used to be the
:10:49. > :10:54.case. If you go back 100 years, for the person who wrote the book on
:10:54. > :10:58.central banking, the Bank of England should be all-powerful, and
:10:58. > :11:02.this is the Boyd that is always forgotten, the rules should not be
:11:02. > :11:06.completely clear, they should not be spelled out. The discretion of
:11:06. > :11:12.the government is the key source of discipline. I think that he's a
:11:12. > :11:17.really important point. If we we run these events, let's go back to
:11:17. > :11:22.2005, the Governor of the Bank of England had been able to haul him
:11:22. > :11:26.Marcus Agius and Bob Diamond and say, we understand that some of you
:11:26. > :11:33.chaps are not complete the playing by the rules, you need to do
:11:33. > :11:37.something about that. It is that combination of power and discretion
:11:37. > :11:44.which produces a good red glittery system, not 2000 pages of
:11:44. > :11:50.legislation. SMAC Regula Torry system. What if they do not follow
:11:50. > :11:56.through. Then the central bank should have the power to act.
:11:56. > :12:03.is where it is so difficult. This is an all-powerful figure.
:12:03. > :12:10.cannot operate if the bank decides to revoke your licence. That is the
:12:10. > :12:15.power of the Bank of England. how do you prove that the trader
:12:15. > :12:20.has transgressed at the boundaries. You need incredibly good evidence
:12:21. > :12:27.if you are going to pursue criminal charges. That is not the object of
:12:27. > :12:32.the exercise, much as we enjoy to imagine people behind bars. And the
:12:32. > :12:36.financial market should operate in a way that is not unfair, does not
:12:36. > :12:40.benefit insiders at the expense of outsiders, and this is really
:12:40. > :12:47.important, the whole world should think that London is a place where
:12:47. > :12:53.honour, the rule of law, are fundamental. In the days are bought
:12:53. > :12:58.a badger, you were not dealing with global financial markets. London
:12:58. > :13:01.was an international financial sector, like it was today. It was
:13:01. > :13:11.an international financial sector precisely because the rest of the
:13:11. > :13:15.world knew it was the best. Do you seriously envisage a world where
:13:15. > :13:19.the Governor of the Bank of England is calling somebody in and say, I
:13:19. > :13:25.he will mark there is a bit of dodgy dealing, and raises his
:13:25. > :13:29.eyebrows at him, and that is going to work in today's world. I did not
:13:29. > :13:36.see how else we are going to make the markets work. You cannot solve
:13:36. > :13:39.the problem we are discussing with enormously complex regulation, and
:13:39. > :13:45.criminal cases with the Serious Fraud Office desperately trying to
:13:45. > :13:50.claim there was a fraud. You have to NPower be authority in such a
:13:50. > :13:56.way that it way that itse discipline on the players. -- to NPower. These
:13:56. > :14:00.things happen because the bank had been essentially rendered impotent
:14:00. > :14:03.by losing supervisory power. Without the power, it was extremely
:14:03. > :14:09.hard for anybody to bring discipline to the City of London.
:14:09. > :14:13.The reputation of the City is the answer -- is the key issue. It
:14:13. > :14:23.extended be on the market and beyond the British banks. We will
:14:23. > :14:24.
:14:24. > :14:27.see revelations to that effect. We have been talking about the
:14:27. > :14:35.arguments he put forward in a series of lectures which you have
:14:35. > :14:45.just given and have been broadcast. One of the are other arguments in
:14:45. > :14:47.
:14:47. > :14:54.make Borrie series of arguments is that a whole generation has broken
:14:54. > :15:01.its deal with subsequent generations. It is in danger and
:15:01. > :15:04.threatening to run just society because it is loaded debt. The
:15:04. > :15:14.older generation now have basically spend too much and have mortgaged
:15:14. > :15:21.the lives of future generations. Eddie have set out of the mind-
:15:21. > :15:26.boggling figures which we have heard many times. It is
:15:26. > :15:33.unsustainable. You paint a fairly bleak picture of the lack of a
:15:33. > :15:37.route out of this. Maddy you see us getting out of this whole? It is
:15:37. > :15:44.extremely difficult. If you add together the public and private
:15:44. > :15:48.debt of the UK, it comes to around 500 % of gross domestic product.
:15:48. > :15:55.There is only one society in history with a higher level of debt
:15:55. > :16:00.to income. Japan. We are up there with Japan in terms of being the
:16:00. > :16:08.most indebted country ever. A lot of that was generated by pants but
:16:08. > :16:15.the other big part was government and household. -- generated by
:16:15. > :16:22.banks. We sought to live beyond our means. Most people argue about this
:16:22. > :16:28.debt in narrowly economic terms. This completely misses the point.
:16:28. > :16:34.The real story is the huge liability that is being passed on
:16:34. > :16:37.by our generation to the next. People who don't get to vote yet.
:16:37. > :16:40.Kits and the unborn. This enormous debt burden will guarantee that
:16:40. > :16:46.most Western economies grow very slowly and youth unemployment stays
:16:46. > :16:51.very high. This is the shocking thing about the last two decades.
:16:51. > :16:55.It is the breach of the social contract between generations. The
:16:56. > :17:01.biggest challenge facing politicians now is to figure out
:17:01. > :17:04.how to restore that before we end up with a completely alienated and
:17:04. > :17:14.disillusioned and the generation who come into an inheritance of
:17:14. > :17:18.
:17:18. > :17:23.debt. What will be the effect of that? I think they may revolt in a
:17:23. > :17:27.way we have not seen before. Most of people assume they should be on
:17:27. > :17:31.the left and are attracted to things like the occupied more --
:17:31. > :17:36.Occupy movement. But what they may find they have to do is move to the
:17:36. > :17:39.right and support those people who favour of radical reform of
:17:39. > :17:43.entitlement systems, welfare systems and other systems that have
:17:43. > :17:47.brought about this explosion in public debt. We may see in the next
:17:47. > :17:54.ten years a shift of the young a wave the positions that were
:17:54. > :17:59.typical of the young from the 1960s to about now. The young will say,
:17:59. > :18:02.why on earth do we have to finance these astonishingly generous
:18:02. > :18:06.pension schemes that have been created for our retiring parents or
:18:06. > :18:10.grandparents? You said it can Americans knew what was good for
:18:10. > :18:17.them, they would all be in the Tea Party? But that is not what is
:18:17. > :18:23.happening now. They are on the left. That is not quite true. The young
:18:23. > :18:26.do not exclusively break to the left. I'm struck by the fact that
:18:26. > :18:31.the students I teach art somewhat to the right of the professors. The
:18:31. > :18:35.shift is already happening and it will become more of an issue. It is
:18:35. > :18:44.no coincidence that many of the politicians to most argue for
:18:44. > :18:49.fiscal reform are relatively young politicians. Their argument for
:18:49. > :18:55.austerity comes from and the politicians than it does from all
:18:55. > :19:00.the politicians. I think a shift is happening. But the government did
:19:00. > :19:09.not have the support. It had to be in coalition to be in power. That
:19:09. > :19:14.may not be the case in a few years. The parties up pointing opposite
:19:14. > :19:20.ways. D think it is not called to be right wing and that is the
:19:20. > :19:24.problem? It may not be cool but it is better to be right than cooler.
:19:24. > :19:34.But is it all the money better to win the argument? I wonder if you
:19:34. > :19:37.
:19:37. > :19:42.think that the Tea Party should be focused on rebranding. The argument
:19:42. > :19:45.has been one. President Obama had to abandon his position on fiscal
:19:45. > :19:48.policy and accept there would need to be reform. That is why the car
:19:48. > :19:55.may have the US moving rapidly towards drastic changes in fiscal
:19:55. > :19:58.policy at the end of this year. He argued there was no problem. The
:19:58. > :20:05.budgets the White House produced were completely fictional. Paul
:20:05. > :20:12.Ryan called him out on this and he finally came around last year. He
:20:12. > :20:15.did not have the nerve to endorse a programme for fiscal reform.
:20:15. > :20:19.argument is not overran France or Greece. It is every Greece and it
:20:19. > :20:26.will be over in France in a few weeks. You can't carry on borrowing.
:20:26. > :20:33.It is over. That age of debt has come to an end. It ended in Greece
:20:33. > :20:38.first. There was the talk of some kind of default. But it was not
:20:38. > :20:41.credible. Francois: Came in promising credible things like
:20:41. > :20:45.Lobbe retirement ages and an increase in public provision for
:20:45. > :20:50.teaching. This will be gone in a matter of weeks because it is not
:20:50. > :20:54.viable. Governments have borrowed to the max. They have reached the
:20:54. > :21:01.point many households have reached Obama administration start their
:21:01. > :21:07.credit cards. But you have made another argument that there is no
:21:07. > :21:16.impetus for change because look at the politics and governments which
:21:16. > :21:22.are supporting people. People will not get rid of the government.
:21:22. > :21:26.point I tried to make is that given it is not sustainable, either we
:21:26. > :21:31.try to reform our broken system of public finance with strong
:21:31. > :21:37.leadership, or it will be reformed forcibly by our inability to raise
:21:37. > :21:43.money to finance our deficits. That is essentially what happened in
:21:43. > :21:47.southern Europe over the last two years. But you can't borrow any
:21:47. > :21:52.more, it -- reforms tend to be imposed at the worst possible time
:21:52. > :21:57.and with the most about of pain. It is better to get ahead of the curve.
:21:57. > :22:01.I think this government has been trying to do that in this country.
:22:01. > :22:11.He did not smart at the suggestion of the right wing but you do hate
:22:11. > :22:15.labels. But you are economically right wing, T you accept that?
:22:15. > :22:19.being against the nationalisation of industry, against subsidies,
:22:19. > :22:24.bloated public sector, protection, if all of these things make me
:22:24. > :22:29.Conservative, so be it. But in the British media, it is a term of
:22:29. > :22:34.abuse designed to undermine an argument. The arguments I'm making
:22:34. > :22:38.are not arguments for fat-cats. Something more has to be done to
:22:38. > :22:46.discipline the bankers. The arguments are for the young who are
:22:46. > :22:51.currently being screwed to use a technical term. If you really
:22:51. > :22:55.believe in a young people and people from low income families and
:22:55. > :22:59.what to see them had a chance of employment and social mobility, you
:22:59. > :23:03.may find yourself having to believe some things that you previously
:23:03. > :23:08.thought the right wing and conservative. You say that right
:23:08. > :23:14.wing is a term of abuse here. You have moved to the US and are
:23:14. > :23:19.clearly happier there and in the UK. You have said that excessive the
:23:19. > :23:29.immense is your greatest weakness. The English hate that but at the
:23:29. > :23:31.
:23:31. > :23:37.Americans love that. That's true. The British hate that? The English
:23:37. > :23:44.don't like it? The English don't like to the Scotsman. That is a
:23:44. > :23:47.reality that goes back to James the 6th. It is so depressing that you
:23:47. > :23:51.can't make an academic argument will feel that you can be heard in
:23:51. > :23:58.the UK. I can be heard but the question is whether I could have