:00:14. > :00:17.unconditional talks. Now on BBC News it's time for HARDtalk.
:00:17. > :00:24.Serious questions are being asked about the competence of economic
:00:24. > :00:26.policy makers in the Western world. In the face of unsustainable debt,
:00:27. > :00:32.dwindling growth, rising unemployment and a banking crisis,
:00:32. > :00:36.have the responses been adequate to the challenge? My guest, Adam Posen,
:00:36. > :00:46.is about to retire as one of the independent members of the Bank of
:00:46. > :00:53.
:00:53. > :01:03.England's Monetary Policy Committee. Why is managing the world's richest
:01:03. > :01:15.
:01:15. > :01:19.economies proving so difficult? Adam Posen, welcome to HARDtalk.
:01:19. > :01:24.Thank you. You have spent three years in London advising the Bank
:01:24. > :01:32.of England. During those three years we have seen an anaemic
:01:32. > :01:36.economy in the UK and we have seen a double-dip recession. Are you
:01:36. > :01:41.leaving with a sense of great disappointment? Sadness that we
:01:41. > :01:46.were not able to do better. It was more about trying to make sure we
:01:46. > :01:52.understood things correctly. The Bank of England did what we could.
:01:52. > :01:58.Was the Monetary Policy Committee, was it consistently behind the
:01:58. > :02:06.curve? That is what it has looked like to outsiders. Every Central
:02:06. > :02:12.Bank and every economic policy maker was behind the curve in 2008.
:02:12. > :02:18.I did not get there until September, 2009. We caught up very quickly. We
:02:18. > :02:24.did great things. I did push for harder, more aggressive stimulus
:02:24. > :02:28.policies starting in late 2010. It took a while for the rest of the
:02:28. > :02:38.committee to go down that road map. That is where they were behind the
:02:38. > :02:40.
:02:40. > :02:46.curve. -- that route. It seems to me there is a fundamental problem.
:02:46. > :02:51.That is, growth forecasts, inflation forecasts, the gritty
:02:51. > :03:01.data you rely on has been consistently wrong over the last 3-
:03:01. > :03:09.
:03:09. > :03:15.4 years. It has been worse on the growth than the inflation. The
:03:15. > :03:20.inflation forecasts we have got our Bayern -- broadly right. The growth
:03:20. > :03:25.forecasts have been disappointing. People in the UK underestimated how
:03:25. > :03:33.much of a drag austerity was going to be. I have said that from a long
:03:33. > :03:39.time ago. Obviously, the eurozone is getting worse and worse and has
:03:39. > :03:45.been a big part of that. He has said you were battling against
:03:45. > :03:49.others inside the Monetary Policy Committee on the issue, in
:03:49. > :03:56.particular on how much to loosen monetary policy and quantitative
:03:56. > :04:00.easing. Pouring new money into buying government debt. You were on
:04:00. > :04:05.the site of listening it dramatically and indulging in
:04:05. > :04:09.quantitative easing. Others opposed you. Would have it made a
:04:09. > :04:14.difference if you won the argument earlier? I do not think they are
:04:14. > :04:19.posed me. They were worried about things that were not legitimate.
:04:19. > :04:25.Like inflation expectations getting out of control. Wages going up too
:04:25. > :04:35.fast. Credibility problems. All of which proved to be nonsense.
:04:35. > :04:36.
:04:36. > :04:41.they didn't. Inflation went up to 5%. When you get buffeted by the
:04:41. > :04:45.storms, you do not move the fundamental instruments. The Bank
:04:45. > :04:51.of England delivered what it was supposed to on inflation. Would it
:04:51. > :04:55.have made a difference if we moved earlier? I think it would have. I
:04:55. > :04:58.think investment would have been higher. In particular, I like to
:04:58. > :05:06.think that consumption would have been higher over the last couple of
:05:06. > :05:16.years. You have flip-flopped on this in recent times. You were an
:05:16. > :05:22.
:05:22. > :05:29.art advocate of quantitative easing. �370 billion, in April you had
:05:29. > :05:35.declare enough had been done. Then in May you call for it again.
:05:35. > :05:45.seem confused. It is made driving down this road, am I go in to take
:05:45. > :05:46.
:05:46. > :05:50.this exit or not? I think I'm almost there, I will take the next
:05:50. > :05:57.one. It does not fill me with confidence that you as a policy-
:05:57. > :06:02.maker no way you are going. We are in uncharted territory. This is
:06:02. > :06:12.going down the road in uncharted territory. I got within one exit of
:06:12. > :06:14.
:06:14. > :06:20.getting it right. This isn't me going down the A4 to Heathrow.
:06:20. > :06:25.Without stretching the metaphor too far, what sort of place is the UK
:06:25. > :06:29.economy in right now? How much extra stimulus does it need? The
:06:29. > :06:34.IMF looked at what you and your colleagues have been doing recently,
:06:34. > :06:42.the advice he offered, they said Britain probably needs more
:06:42. > :06:45.aggressive monetary policies. Think about lowering interest rates.
:06:46. > :06:49.Talking about whether to lower interest rates and quantitative
:06:49. > :06:56.easing, there is not a big distinction between them. What
:06:56. > :07:00.happened was, I do not think flip- flopped is quite fair. Where I let
:07:00. > :07:09.the data speak, we thought productivity was going to get
:07:09. > :07:14.better ones we saw the private sector kept hiring. There is no way
:07:14. > :07:19.that recession-hit businesses are going to keep adding employees.
:07:19. > :07:24.There was reason to think we were not in a disaster. A lot of reports
:07:24. > :07:30.are coming out saying we are not in the double-dip recession, we are
:07:30. > :07:36.not in the tight contraction we had in 2008 and 2009. Things are still
:07:36. > :07:39.unsatisfactory, but the UK economy, it is in a state of poor growth,
:07:39. > :07:44.stagnation, we could be doing better with the potential we have
:07:44. > :07:48.got. In terms of wider Europe, we are relatively lucky. The
:07:48. > :07:54.unemployment rate is nowhere near as high as it is in Spain or
:07:54. > :07:58.Portugal. It is still bad. Youth unemployment is particularly bad.
:07:58. > :08:02.Yet, the government points to the fact that jobs are being created in
:08:03. > :08:09.large numbers. How can that square with the fact that we are
:08:09. > :08:14.technically in recession? Jobs are being created. That is why some of
:08:14. > :08:17.us want to look past the technically in recession. Let's
:08:17. > :08:23.focus on the big picture story. Mervyn King has also emphasised
:08:23. > :08:26.this. We are not growing as fast as you normally would when coming out
:08:26. > :08:35.of the recession. We are not in complete contraction because
:08:35. > :08:40.private sector is adding jobs. On net. Youth unemployment is a real
:08:40. > :08:48.problem as Alastair Darling just read about there is a call for
:08:48. > :08:56.bipartisan ship on this. That is the one place where the UK labour
:08:56. > :09:01.market is not healthy. Compare it to the US, Spain or Portugal,
:09:01. > :09:06.participation rates in the US have come down. The UK market is working
:09:06. > :09:11.well. The Federal Reserve in the country you know best has a remit
:09:11. > :09:16.which is not just about keeping prices stable, but maximising
:09:16. > :09:22.employment. The Bank of England does not have that remit. It is
:09:23. > :09:27.only fixated on controlling inflation. Is that wrong? If you
:09:27. > :09:33.read the remit carefully, it is given to us by Parliament and
:09:33. > :09:37.confirmed by government. We are to keep inflation over the medium term
:09:37. > :09:41.and to say in a way that is consistent with a stable growing
:09:41. > :09:49.economy. We should not be shooting off like we did in the 70s. Doing
:09:49. > :09:57.everything possible to pump up the economy through short-term measures.
:09:57. > :10:02.We wanted to make sure the economy did not deflate... Not long ago you
:10:02. > :10:12.said, the Bank of England should have bands and anguished religious
:10:12. > :10:13.
:10:13. > :10:18.ethic over just filed intervention. -- justified. It is not a problem
:10:18. > :10:28.with the mandate. The problem the Bank of England had, the Bank of
:10:28. > :10:30.
:10:30. > :10:35.decide what assets the bank and buy the stock what intervention, the
:10:35. > :10:40.form of the intervention. -- the bank can buy. Myself and other
:10:40. > :10:48.members of the committee have suggested we should be buying other
:10:48. > :10:53.things. That was the key way I feel we did not live up. Bundles of
:10:53. > :10:58.private sector debt. Security debt. Special bonds being issued to
:10:58. > :11:03.finance construction or infrastructure. The creative thing
:11:03. > :11:07.that the Bank of England came out with is a step in that direction. I
:11:07. > :11:11.would want the bank to do more to go around the banking system rather
:11:11. > :11:16.than working with the current banking system. What about setting
:11:16. > :11:20.up a public bank specifically to lend to small and medium-sized
:11:20. > :11:29.enterprises which summed it all have admitted as the best way to
:11:29. > :11:34.getting money? -- some people. 2010 and 2011 I gave two speeches
:11:34. > :11:39.getting that issue onto the agenda. It has not been delivered. When you
:11:40. > :11:44.say some people. Is that why you are leaving? You are frustrated.
:11:44. > :11:51.I'm leaving because I came to the in a job
:11:51. > :11:56.in Washington at the Institute I used to work out. It was a job I
:11:57. > :12:01.could not refuse. There is a political context to this. We talk
:12:01. > :12:06.about monetary policy. That is what your committee does. You have to
:12:06. > :12:10.consider the wider economic context, which takes in fiscal policy, tax
:12:10. > :12:15.and spend issues. You have been working for the Bank of England in
:12:15. > :12:20.a country where the government is committed to an austerity programme.
:12:20. > :12:24.Which I suspect you believe has in some ways been damaging, am I
:12:24. > :12:29.right? I believe the short-term effects of the economy, what we
:12:29. > :12:32.have seen in the last couple of years was predictable. It made
:12:32. > :12:38.unemployment higher than it would have been. Consumption lower than
:12:38. > :12:43.it would have been. It interfered with public investment. It is for
:12:43. > :12:47.elected officials to decide what are the balances and risks. This
:12:47. > :12:53.government won a majority on this ballot. They were very clear this
:12:53. > :12:58.was what they were going to do. There are big ticket items that the
:12:58. > :13:08.Bank of England should not be deciding. There was this idea in
:13:08. > :13:09.
:13:09. > :13:15.2010, if we do not do something we might end up like Grace.
:13:15. > :13:20.appreciate the modesty. Mervyn King said in 2010, when the coalition
:13:20. > :13:24.was being formed, he chose to give what can only be described as
:13:24. > :13:29.backing to George Osborne's idea of eliminating the structural deficit
:13:29. > :13:35.in the UK within the lifetime of a single parliament. He said, I am
:13:35. > :13:41.very pleased there is a clear and binding commitment to accelerate
:13:41. > :13:46.the reduction in the deficit. said on record before the Treasury
:13:46. > :13:54.Select Committee in November 2010, I opposed to making that statement
:13:54. > :14:04.internally. I have been on record since the early 2000s, the central
:14:04. > :14:09.
:14:09. > :14:13.banks have no business, -- commenting on fiscal policy. I do
:14:13. > :14:17.not think unelected official should be doing it. The last 2.5 years you
:14:17. > :14:23.have had to advise and work closely with this guy who you believe made
:14:23. > :14:28.a fundamental and strategic error. We all have to work with different
:14:28. > :14:32.kinds of people. Mervyn King is a true public servant. He is trying
:14:32. > :14:36.to do the right thing for the economy. On that particular issue I
:14:37. > :14:42.disagree. A huge issue. Do you think it is time for Mervyn King to
:14:42. > :14:47.go? His term ends in less than one year. He will be succeeded by
:14:47. > :14:51.someone else. He is the party will be no bad thing? The Governor has
:14:51. > :14:55.been a true public seven for the bank and has done a lot of good
:14:56. > :14:59.things. He has been very brave on a lot of issues and he has given me
:14:59. > :15:06.and other members of the committee room to disagree with him. I am not
:15:06. > :15:11.going to get into that. I'm not going to evaluate his job. In that
:15:11. > :15:21.instance, I happen to disagree with him. I do nothing unelected
:15:21. > :15:26.
:15:26. > :15:33.officials should be speaking around It seems there is always,
:15:33. > :15:39.particularly right now, a debate within top economists about whether
:15:39. > :15:45.the current situation proves that in essence, King was right and the
:15:45. > :15:51.government has to pump the economy. Somebody has to do it and it has to
:15:51. > :15:56.be the government. Or, those who say absolutely not, at a time when
:15:56. > :16:05.I get is the insurmountable problem, piling new deck is a mistake. The
:16:05. > :16:11.private sector will deliver. have had the evidence on their side
:16:11. > :16:20.and it has turned out to be right, those that follow King. They have
:16:20. > :16:25.not won the argument because it was not all evidence base. Interest
:16:25. > :16:30.rates will stay low when there is a lack of private sector demand. The
:16:30. > :16:36.wages will stay low, the Government's I go in to not be held
:16:36. > :16:45.under threat by a bond government. And they're fee for what to do with
:16:45. > :16:51.their money. When you withdraw all add fiscal... All those things were
:16:51. > :17:01.proving to be right by King. And by recent experience in the UK and
:17:01. > :17:02.
:17:02. > :17:07.when I wait in Japan. You know... I do not know why... Except in a
:17:07. > :17:13.Europe with the sovereign debt crisis upon a sovereign debt crisis.
:17:13. > :17:18.You argue that you build up more dead. It is not a desperate effort,
:17:18. > :17:28.it is a necessary effort because we are in desperate situations. It is
:17:28. > :17:32.
:17:32. > :17:39.why you spend it on. As a different economists have said, 20 economise,
:17:39. > :17:42.none of whom have said we should do constructive public sector
:17:42. > :17:47.investment, you should not cut investment because what you spend
:17:47. > :17:51.it on and at what price. As interest rates are more -- lowered
:17:51. > :17:56.it does not make any sense to sit on the money. These arguments go
:17:56. > :18:00.far beyond the UK. Talking about the euro's on, mauve and King, the
:18:00. > :18:05.Governor of the Bank of England, has always said the greatest threat
:18:05. > :18:11.to the UK economy is the crisis in the eurozone getting worse and the
:18:11. > :18:15.prospect of a possible break-up, do you agree? I agree that if it will
:18:15. > :18:21.get worse, it will overwhelm the UK economy in ways we cannot do much
:18:21. > :18:29.about. You know Germany very well, when you look at the argument
:18:29. > :18:33.raging in Germany about whether to front up and guarantee the debts of
:18:33. > :18:38.the very weak Sovereign's around the southern periphery of a Europe,
:18:39. > :18:46.do you believe that in the end, for political and constitutional
:18:47. > :18:52.reasons, there is going to be we constituting of the euro, for
:18:52. > :18:58.example Greece leaving Europe? is in Germany's interests, its
:18:58. > :19:03.commercial and economic interest not just its idealistic injures, to
:19:03. > :19:08.restructure the debt. This is a mere -- mirror image of one Germany
:19:09. > :19:12.went through after World War One. For Germany to take the heat.
:19:12. > :19:15.Germany's lenders who made the mistake of lending to all these
:19:15. > :19:20.countries. They had to get the money from somewhere. It was a
:19:20. > :19:24.German government decision and Austrian banks and Dutch fans who
:19:24. > :19:27.lent the money to all these countries and they lend the money
:19:27. > :19:32.to countries and companies so they could buy German exports. Germany
:19:32. > :19:36.has been running, just as some prime lenders in the US, they had
:19:36. > :19:42.been running a scheme in the Rhone pingers. You want to restructure
:19:42. > :19:47.the debt. You can not make it all under borrow. Somehow it has to be
:19:47. > :19:50.more has an allowance. But at the Economist magazine ran a cover the
:19:50. > :19:55.other day, suggesting Angela Merkel is reaching a point of decision
:19:55. > :20:02.where she may look at the balance of the equation, when it comes to
:20:02. > :20:09.his campaign, and decide it is less long-term risk to supervise a
:20:09. > :20:14.break-up of the eurozone than continue down the path. That will
:20:14. > :20:19.be a ill-advised move. It is pure political pandering to pretend
:20:19. > :20:25.otherwise. The currency would should through the roof, the trade
:20:25. > :20:29.relations would be disrupted, the banks will be on the Ballard least.
:20:29. > :20:36.You would reinforce that incentives. You would reinforce and narrative
:20:37. > :20:46.in Germany that makes no sense that it was morally light and -- right
:20:47. > :20:51.
:20:51. > :20:56.to pay dud mack... There is democracy as well as economics. As
:20:56. > :21:02.long as the people are prepared to take the pain, that is not viable.
:21:02. > :21:09.All the pain they are going to get... If they did a proper debt
:21:09. > :21:14.restructuring, they would get some losses in the banking system but
:21:14. > :21:17.that would be it. Trade, export would go on, the losses would be
:21:17. > :21:22.slower, the would-be political stability, the currency would not
:21:22. > :21:30.decreasing at, the banks would dud mack maybe you're right but frankly,
:21:30. > :21:36.Germans may not believe. Just one final question on Europe, the boss
:21:36. > :21:41.of the European Central Bank has said all summer that the ECB will
:21:41. > :21:48.do whatever it takes to ensure stabilisation and stability in the
:21:48. > :21:55.euro's on. His back trouble? I wish they would get on with it -- is
:21:56. > :22:01.that incredible? I wish they would get on with it. I do not think the
:22:01. > :22:08.ECB has any business sang very risks to the eurozone bullet in our
:22:08. > :22:13.response until we see the fiscal measures we like. In Italy, there
:22:13. > :22:18.are shutdowns in the bond market. They are undermining the eurozone
:22:18. > :22:25.and the world economy. On your political point, it is not about
:22:25. > :22:30.economics. Angela Merkel is free. She is an elected official. She has
:22:30. > :22:35.every right to say she will not bail out those countries. But from
:22:35. > :22:40.the economics, it would be a self- inflicted wounds. I would hope she
:22:40. > :22:45.would explain the true to the people rather than pander to them.
:22:45. > :22:50.You are going home to the US to run an influential economic think tank.
:22:50. > :22:57.Do you have any confidence they are in better hands than in Europe?
:22:57. > :23:03.much. When you look at the election, considering that Mitt Romney is
:23:03. > :23:10.taking on Paul Ryan as his running mate who envisages the most
:23:10. > :23:14.swingeing cut to the Federal Budget and activity in the next decade, is
:23:14. > :23:20.there now that clear-cut government which will be the centrepiece of
:23:20. > :23:30.the election? That is my optimistic take. I am hoping that by me
:23:30. > :23:36.running decided to make Brian his running mate, we will have a debate
:23:36. > :23:42.-- Paul Ryan. Things will have to come out in public. When you talk
:23:42. > :23:46.about cuts, one of the things that has happened, since Paul Ryan has
:23:46. > :23:53.been nominated, is we have had some stuff about about his numbers and
:23:53. > :23:58.make the economic advisers looking in out to make his numbers were. We
:23:58. > :24:07.need to make sure the numbers work. It could be a good election. Some
:24:07. > :24:14.senior Democrats including the core author of the plant to get rid of
:24:14. > :24:20.the deficit, has praise Paul Ryan who he says has a sensible Budget
:24:20. > :24:25.plan. I do not want to praise politician one way or another. I do
:24:25. > :24:34.know that on the numbers, the current plans as examined by the