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why particles have mass. Now on BBC News, it is time for | :00:03. | :00:12. | |
HARDtalk. The British Government has promised | :00:12. | :00:17. | |
action to deal with the scandal at Barclays. The bank has been fined | :00:17. | :00:20. | |
for trying to fix the interest rate at which banks lend to each other. | :00:20. | :00:25. | |
Yet again it is the lack of regulation that is being blamed for | :00:25. | :00:29. | |
a financial problem. My guess today argues that the world is responding | :00:29. | :00:34. | |
in the wrong way to the global financial crisis. He is Professor | :00:34. | :00:38. | |
Niall Ferguson, and he thinks the economic chaos was caused by too | :00:38. | :00:48. | |
:00:48. | :01:11. | ||
much regulation, not too little. Welcome to HARDtalk. When you see | :01:11. | :01:15. | |
what Barclays was up to, trying to manipulate the interbank rate, | :01:15. | :01:21. | |
surely the answer do that is more regulation. I am quite interested | :01:21. | :01:25. | |
to know what kind of regulation could be devised to ball into the | :01:25. | :01:31. | |
minds of traders, at all the banks, in the City of London, subject them | :01:31. | :01:36. | |
to some kind of lie detection test, and make sure that when | :01:36. | :01:42. | |
representatives of the Bank meet to set LIBOR rent -- lending rates, | :01:42. | :01:47. | |
they told the truth, the whole truth. It would be pretty hard to | :01:47. | :01:50. | |
come up with that regulation. It is highly desirable that they tell the | :01:50. | :01:56. | |
truth, and the fact that they did not is to be condemned, but I think | :01:56. | :02:00. | |
the point that I made in my lectures, is that imagine if you | :02:00. | :02:04. | |
can solve problems like that, with complex regulations, it is an | :02:04. | :02:09. | |
illusion. We will come up to the arguments that you made. On the | :02:09. | :02:12. | |
question of what happened at Barclay's, and from what we | :02:12. | :02:18. | |
understand has probably happened at other banks, the FSA find Barclays. | :02:18. | :02:23. | |
But it did not feel it had the power to prosecute. That is | :02:23. | :02:29. | |
something the Chancellor says will be changing. It is far from clear | :02:29. | :02:35. | |
that what happened could testify a criminal prosecution under the law | :02:35. | :02:41. | |
that existed. So a new law is needed to deal with that. That is | :02:41. | :02:45. | |
not to say that there was not a regulation of the interbank lending | :02:45. | :02:50. | |
market, it there was. The issue is highly technical, which we need to | :02:50. | :02:56. | |
take some time to discuss. The London interbank rate is set, in | :02:56. | :03:03. | |
this case, representatives of 16 banks, who then say when they meet, | :03:03. | :03:07. | |
that what they think their bank would be able to borrow money at, | :03:07. | :03:14. | |
from another bank, on the day in question. They then take these | :03:14. | :03:19. | |
estimates... you have to understand how complex this is, they take the | :03:19. | :03:23. | |
16 estimates, they cut off the top ones and the bottom ones, and they | :03:23. | :03:30. | |
take the average of the middle ones. That is the rate that appears. That | :03:30. | :03:35. | |
is what the Barclay's representatives were trying to fix. | :03:35. | :03:42. | |
The impact of police more sheets in the rate is the issue. -- pretty | :03:42. | :03:47. | |
small shifts. Because it is used as the basis for a lot of contracts, | :03:47. | :03:52. | |
it has an impact. But it is not a market rate. It is set in effect by | :03:52. | :03:57. | |
a committee. Given what we know by what happened at Barclays, they | :03:57. | :04:02. | |
were doing it to make money, and then it was to hide the fact they | :04:02. | :04:06. | |
appeared to be under financial stress. What we do know is they | :04:06. | :04:10. | |
have been fined, a lot of people look at this and say that is | :04:10. | :04:16. | |
bordering on criminal, what is going on. They should be prosecuted. | :04:16. | :04:21. | |
The intention is to introduce, whether it is legislation or not, | :04:21. | :04:25. | |
to change the rules so that in future, somebody could be | :04:25. | :04:32. | |
prosecuted. Is that something that you would welcome? We want to see | :04:32. | :04:37. | |
the truth told. As I said to you earlier, I am not entirely sure how | :04:37. | :04:44. | |
any regulation is going to ensure that. But if you know there is a | :04:44. | :04:48. | |
heavy penalty at the end of the process... there was a heavy | :04:48. | :04:52. | |
penalty already. The chief executive officer is gone, the | :04:52. | :04:57. | |
chairman has gone, the chief operating officer is gone. The | :04:57. | :05:01. | |
penalty in terms of their careers was already Severe. Whether there | :05:01. | :05:06. | |
is a criminal case to be made is not clear. Let's follow it through. | :05:07. | :05:12. | |
What is extremely hard to imagine is a regulation that can enforce | :05:12. | :05:15. | |
truth-telling when those representatives meet. The only | :05:15. | :05:19. | |
reason we know that they were not telling the whole truth is that | :05:19. | :05:23. | |
there were e-mails between traders. These emails were never be written | :05:23. | :05:30. | |
again. And that is because of what happened. You seem to be suggesting | :05:30. | :05:37. | |
that things were working OK. I do not think that is OK. The point I | :05:37. | :05:45. | |
am making is that you cannot devise a regulation that ensures that. Let | :05:45. | :05:51. | |
me try to pursue this point. It is a really important point. The | :05:51. | :05:56. | |
mistake we are making on dealing with the financial crisis, is that | :05:56. | :06:03. | |
imagining you can devise enormously detailed statutory provisions, or | :06:03. | :06:07. | |
what will emerge from the John Vickers report, which will prevent | :06:07. | :06:11. | |
the things that happened in the run-up to the crisis. That is not | :06:12. | :06:16. | |
realistic. These are highly unlikely to be prevented by a | :06:17. | :06:21. | |
regulation, no long -- no matter how long all wordy it is. What | :06:21. | :06:24. | |
happens in the next financial crisis will be quite different to | :06:24. | :06:32. | |
this one. We have to be realistic about what you can achieve that. | :06:33. | :06:37. | |
You have argued that less regulation, but enforceable | :06:37. | :06:41. | |
regulation, and this case seems to illustrate, we have seen the chief | :06:41. | :06:45. | |
executive lose his job, and the chief operating officer resigned, | :06:45. | :06:53. | |
but nobody has been prosecuted. This has only just come to light. | :06:53. | :07:00. | |
They may more walk away with huge sums. If you are to create a | :07:00. | :07:05. | |
penalty that acts as a deterrent, even in a very simple system, but | :07:05. | :07:09. | |
you put forward, surely cases like this need to be dealt with more | :07:09. | :07:16. | |
severely. What are you going to do? Are you going to pass an act | :07:16. | :07:22. | |
against telling fibs? What are you proposing? One of the things that | :07:22. | :07:26. | |
you have to learn about the financial system is that the crisis | :07:26. | :07:32. | |
we just saw happen in a relatively regulated market, which is the US | :07:32. | :07:37. | |
mortgage market, and the transatlantic banking system. There | :07:37. | :07:41. | |
was a whole host of regulatory bodies supposed to represent | :07:41. | :07:45. | |
malfeasance in those markets. The less regulated sectors, such as | :07:45. | :07:51. | |
hedge funds, were not the problem. Regulation itself does not prevent | :07:51. | :07:59. | |
financial crisis. Accept that. I am trying to move on to the penalties. | :07:59. | :08:04. | |
Let's be clear. Creating a more complex regulation, passing more | :08:04. | :08:08. | |
rules to deal with things that happen in the past were not | :08:08. | :08:14. | |
prevented the next financial crisis. We are making the next financial | :08:14. | :08:19. | |
crisis more likely by creating ever more complex regulatory frameworks. | :08:19. | :08:23. | |
That is happening not only in this country but in the US, but if you | :08:23. | :08:27. | |
look at Basle, where the next rating is happening, there is a new | :08:27. | :08:34. | |
set of complex regulations. What I'm not clear is what you are | :08:34. | :08:42. | |
therefore proposing should happen. It is hard, if you are talking | :08:42. | :08:44. | |
about the seating successful criminal prosecutions, it is | :08:44. | :08:49. | |
extremely hard to achieve this. The Serious Fraud Office has had a | :08:49. | :08:53. | |
terrible time trying to get convictions. In most recent events, | :08:53. | :08:57. | |
the things that lead up to and produce to the crisis, we did not | :08:57. | :09:02. | |
see a huge amount of fraudulent activity. Bernie Madoff is the | :09:02. | :09:07. | |
exception. What we saw was a very reckless activity, mismanagement of | :09:07. | :09:16. | |
banks such as Leman brothers... interruption is the BBC will, but | :09:16. | :09:24. | |
let meet the dish. -- let me finish. There is not some kind of magical | :09:24. | :09:28. | |
mechanism that you can create a day, that would create criminal offences | :09:28. | :09:32. | |
that do not currently exist, that will prevent the next financial | :09:32. | :09:38. | |
crisis. I understand why people feel enraged, I feel angry as well, | :09:38. | :09:42. | |
I explicitly said that there need to be some people sent to jail if | :09:42. | :09:47. | |
we are to have confidence in London and New York restored. But the | :09:47. | :09:51. | |
reality is that it is extremely hard to do. Most of the things that | :09:51. | :09:59. | |
produced the crisis were not fraud. What is your answer? I am accepting | :09:59. | :10:05. | |
your argument, no more layers, we are creating the next problem, so | :10:05. | :10:09. | |
if Professor Ferguson was devising the rules, if you were scaling back | :10:09. | :10:13. | |
what already exists, what would the regime look like and how could you | :10:13. | :10:20. | |
enforce it? In dividing the system between the Bank of England, the | :10:21. | :10:25. | |
financial regulator, and other smaller regulators, it has not | :10:25. | :10:30. | |
worked out well. The tripartite system that Gordon Brown introduced | :10:30. | :10:40. | |
:10:40. | :10:40. | ||
as Chancellor has been a failure. What is happening that I approve of | :10:40. | :10:43. | |
his two -- is a division in the banking system, as used to be the | :10:44. | :10:49. | |
case. If you go back 100 years, for the person who wrote the book on | :10:49. | :10:54. | |
central banking, the Bank of England should be all-powerful, and | :10:54. | :10:58. | |
this is the Boyd that is always forgotten, the rules should not be | :10:58. | :11:02. | |
completely clear, they should not be spelled out. The discretion of | :11:02. | :11:06. | |
the government is the key source of discipline. I think that he's a | :11:06. | :11:12. | |
really important point. If we we run these events, let's go back to | :11:12. | :11:17. | |
2005, the Governor of the Bank of England had been able to haul him | :11:17. | :11:22. | |
Marcus Agius and Bob Diamond and say, we understand that some of you | :11:22. | :11:26. | |
chaps are not complete the playing by the rules, you need to do | :11:26. | :11:33. | |
something about that. It is that combination of power and discretion | :11:33. | :11:37. | |
which produces a good red glittery system, not 2000 pages of | :11:37. | :11:44. | |
legislation. SMAC Regula Torry system. What if they do not follow | :11:44. | :11:50. | |
through. Then the central bank should have the power to act. | :11:50. | :11:56. | |
is where it is so difficult. This is an all-powerful figure. | :11:56. | :12:03. | |
cannot operate if the bank decides to revoke your licence. That is the | :12:03. | :12:10. | |
power of the Bank of England. how do you prove that the trader | :12:10. | :12:15. | |
has transgressed at the boundaries. You need incredibly good evidence | :12:15. | :12:20. | |
if you are going to pursue criminal charges. That is not the object of | :12:21. | :12:27. | |
the exercise, much as we enjoy to imagine people behind bars. And the | :12:27. | :12:32. | |
financial market should operate in a way that is not unfair, does not | :12:32. | :12:36. | |
benefit insiders at the expense of outsiders, and this is really | :12:36. | :12:40. | |
important, the whole world should think that London is a place where | :12:40. | :12:47. | |
honour, the rule of law, are fundamental. In the days are bought | :12:47. | :12:53. | |
a badger, you were not dealing with global financial markets. London | :12:53. | :12:58. | |
was an international financial sector, like it was today. It was | :12:58. | :13:01. | |
an international financial sector precisely because the rest of the | :13:01. | :13:11. | |
world knew it was the best. Do you seriously envisage a world where | :13:11. | :13:15. | |
the Governor of the Bank of England is calling somebody in and say, I | :13:15. | :13:19. | |
he will mark there is a bit of dodgy dealing, and raises his | :13:19. | :13:25. | |
eyebrows at him, and that is going to work in today's world. I did not | :13:25. | :13:29. | |
see how else we are going to make the markets work. You cannot solve | :13:29. | :13:36. | |
the problem we are discussing with enormously complex regulation, and | :13:36. | :13:39. | |
criminal cases with the Serious Fraud Office desperately trying to | :13:39. | :13:45. | |
claim there was a fraud. You have to NPower be authority in such a | :13:45. | :13:50. | |
way that it way that itse discipline on the players. -- to NPower. These | :13:50. | :13:56. | |
things happen because the bank had been essentially rendered impotent | :13:56. | :14:00. | |
by losing supervisory power. Without the power, it was extremely | :14:00. | :14:03. | |
hard for anybody to bring discipline to the City of London. | :14:03. | :14:09. | |
The reputation of the City is the answer -- is the key issue. It | :14:09. | :14:13. | |
extended be on the market and beyond the British banks. We will | :14:13. | :14:23. | |
:14:23. | :14:24. | ||
see revelations to that effect. We have been talking about the | :14:24. | :14:27. | |
arguments he put forward in a series of lectures which you have | :14:27. | :14:35. | |
just given and have been broadcast. One of the are other arguments in | :14:35. | :14:45. | |
:14:45. | :14:47. | ||
make Borrie series of arguments is that a whole generation has broken | :14:47. | :14:54. | |
its deal with subsequent generations. It is in danger and | :14:54. | :15:01. | |
threatening to run just society because it is loaded debt. The | :15:01. | :15:04. | |
older generation now have basically spend too much and have mortgaged | :15:04. | :15:14. | |
the lives of future generations. Eddie have set out of the mind- | :15:14. | :15:21. | |
boggling figures which we have heard many times. It is | :15:21. | :15:26. | |
unsustainable. You paint a fairly bleak picture of the lack of a | :15:26. | :15:33. | |
route out of this. Maddy you see us getting out of this whole? It is | :15:33. | :15:37. | |
extremely difficult. If you add together the public and private | :15:37. | :15:44. | |
debt of the UK, it comes to around 500 % of gross domestic product. | :15:44. | :15:48. | |
There is only one society in history with a higher level of debt | :15:48. | :15:55. | |
to income. Japan. We are up there with Japan in terms of being the | :15:55. | :16:00. | |
most indebted country ever. A lot of that was generated by pants but | :16:00. | :16:08. | |
the other big part was government and household. -- generated by | :16:08. | :16:15. | |
banks. We sought to live beyond our means. Most people argue about this | :16:15. | :16:22. | |
debt in narrowly economic terms. This completely misses the point. | :16:22. | :16:28. | |
The real story is the huge liability that is being passed on | :16:28. | :16:34. | |
by our generation to the next. People who don't get to vote yet. | :16:34. | :16:37. | |
Kits and the unborn. This enormous debt burden will guarantee that | :16:37. | :16:40. | |
most Western economies grow very slowly and youth unemployment stays | :16:40. | :16:46. | |
very high. This is the shocking thing about the last two decades. | :16:46. | :16:51. | |
It is the breach of the social contract between generations. The | :16:51. | :16:55. | |
biggest challenge facing politicians now is to figure out | :16:56. | :17:01. | |
how to restore that before we end up with a completely alienated and | :17:01. | :17:04. | |
disillusioned and the generation who come into an inheritance of | :17:04. | :17:14. | |
:17:14. | :17:18. | ||
debt. What will be the effect of that? I think they may revolt in a | :17:18. | :17:23. | |
way we have not seen before. Most of people assume they should be on | :17:23. | :17:27. | |
the left and are attracted to things like the occupied more -- | :17:27. | :17:31. | |
Occupy movement. But what they may find they have to do is move to the | :17:31. | :17:36. | |
right and support those people who favour of radical reform of | :17:36. | :17:39. | |
entitlement systems, welfare systems and other systems that have | :17:39. | :17:43. | |
brought about this explosion in public debt. We may see in the next | :17:43. | :17:47. | |
ten years a shift of the young a wave the positions that were | :17:47. | :17:54. | |
typical of the young from the 1960s to about now. The young will say, | :17:54. | :17:59. | |
why on earth do we have to finance these astonishingly generous | :17:59. | :18:02. | |
pension schemes that have been created for our retiring parents or | :18:02. | :18:06. | |
grandparents? You said it can Americans knew what was good for | :18:06. | :18:10. | |
them, they would all be in the Tea Party? But that is not what is | :18:10. | :18:17. | |
happening now. They are on the left. That is not quite true. The young | :18:17. | :18:23. | |
do not exclusively break to the left. I'm struck by the fact that | :18:23. | :18:26. | |
the students I teach art somewhat to the right of the professors. The | :18:26. | :18:31. | |
shift is already happening and it will become more of an issue. It is | :18:31. | :18:35. | |
no coincidence that many of the politicians to most argue for | :18:35. | :18:44. | |
fiscal reform are relatively young politicians. Their argument for | :18:44. | :18:49. | |
austerity comes from and the politicians than it does from all | :18:49. | :18:55. | |
the politicians. I think a shift is happening. But the government did | :18:55. | :19:00. | |
not have the support. It had to be in coalition to be in power. That | :19:00. | :19:09. | |
may not be the case in a few years. The parties up pointing opposite | :19:09. | :19:14. | |
ways. D think it is not called to be right wing and that is the | :19:14. | :19:20. | |
problem? It may not be cool but it is better to be right than cooler. | :19:20. | :19:24. | |
But is it all the money better to win the argument? I wonder if you | :19:24. | :19:34. | |
:19:34. | :19:37. | ||
think that the Tea Party should be focused on rebranding. The argument | :19:37. | :19:42. | |
has been one. President Obama had to abandon his position on fiscal | :19:42. | :19:45. | |
policy and accept there would need to be reform. That is why the car | :19:45. | :19:48. | |
may have the US moving rapidly towards drastic changes in fiscal | :19:48. | :19:55. | |
policy at the end of this year. He argued there was no problem. The | :19:55. | :19:58. | |
budgets the White House produced were completely fictional. Paul | :19:58. | :20:05. | |
Ryan called him out on this and he finally came around last year. He | :20:05. | :20:12. | |
did not have the nerve to endorse a programme for fiscal reform. | :20:12. | :20:15. | |
argument is not overran France or Greece. It is every Greece and it | :20:15. | :20:19. | |
will be over in France in a few weeks. You can't carry on borrowing. | :20:19. | :20:26. | |
It is over. That age of debt has come to an end. It ended in Greece | :20:26. | :20:33. | |
first. There was the talk of some kind of default. But it was not | :20:33. | :20:38. | |
credible. Francois: Came in promising credible things like | :20:38. | :20:41. | |
Lobbe retirement ages and an increase in public provision for | :20:41. | :20:45. | |
teaching. This will be gone in a matter of weeks because it is not | :20:45. | :20:50. | |
viable. Governments have borrowed to the max. They have reached the | :20:50. | :20:54. | |
point many households have reached Obama administration start their | :20:54. | :21:01. | |
credit cards. But you have made another argument that there is no | :21:01. | :21:07. | |
impetus for change because look at the politics and governments which | :21:07. | :21:16. | |
are supporting people. People will not get rid of the government. | :21:16. | :21:22. | |
point I tried to make is that given it is not sustainable, either we | :21:22. | :21:26. | |
try to reform our broken system of public finance with strong | :21:26. | :21:31. | |
leadership, or it will be reformed forcibly by our inability to raise | :21:31. | :21:37. | |
money to finance our deficits. That is essentially what happened in | :21:37. | :21:43. | |
southern Europe over the last two years. But you can't borrow any | :21:43. | :21:47. | |
more, it -- reforms tend to be imposed at the worst possible time | :21:47. | :21:52. | |
and with the most about of pain. It is better to get ahead of the curve. | :21:52. | :21:57. | |
I think this government has been trying to do that in this country. | :21:57. | :22:01. | |
He did not smart at the suggestion of the right wing but you do hate | :22:01. | :22:11. | |
labels. But you are economically right wing, T you accept that? | :22:11. | :22:15. | |
being against the nationalisation of industry, against subsidies, | :22:15. | :22:19. | |
bloated public sector, protection, if all of these things make me | :22:19. | :22:24. | |
Conservative, so be it. But in the British media, it is a term of | :22:24. | :22:29. | |
abuse designed to undermine an argument. The arguments I'm making | :22:29. | :22:34. | |
are not arguments for fat-cats. Something more has to be done to | :22:34. | :22:38. | |
discipline the bankers. The arguments are for the young who are | :22:38. | :22:46. | |
currently being screwed to use a technical term. If you really | :22:46. | :22:51. | |
believe in a young people and people from low income families and | :22:51. | :22:55. | |
what to see them had a chance of employment and social mobility, you | :22:55. | :22:59. | |
may find yourself having to believe some things that you previously | :22:59. | :23:03. | |
thought the right wing and conservative. You say that right | :23:03. | :23:08. | |
wing is a term of abuse here. You have moved to the US and are | :23:08. | :23:14. | |
clearly happier there and in the UK. You have said that excessive the | :23:14. | :23:19. | |
immense is your greatest weakness. The English hate that but at the | :23:19. | :23:29. | |
:23:29. | :23:31. | ||
Americans love that. That's true. The British hate that? The English | :23:31. | :23:37. | |
don't like it? The English don't like to the Scotsman. That is a | :23:37. | :23:44. | |
reality that goes back to James the 6th. It is so depressing that you | :23:44. | :23:47. | |
can't make an academic argument will feel that you can be heard in | :23:47. | :23:51. | |
the UK. I can be heard but the question is whether I could have | :23:51. | :23:58. |