:00:00. > :00:09.You up-to-date on the headlines. It is time now for HARDtalk.
:00:10. > :00:18.Welcome to HARDtalk, I am Stephen Sackur. How sound are the
:00:19. > :00:21.foundations of the world economy? Eight years after the financial
:00:22. > :00:26.meltdown which rocked global capitalism, the answer seems to be,
:00:27. > :00:30.they are disturbingly fragile. That is the view of my guess today,
:00:31. > :00:37.economist and former governor of the bank of ignorant, England, Mervyn
:00:38. > :00:43.King. He was a player saving the banking system from terminal
:00:44. > :00:48.collapse in the dark days of '08 and says another great crisis is looming
:00:49. > :01:09.and less, well, unless what? -- Bank of England.
:01:10. > :01:22.Lord King, welcome to HARDtalk. Thank you. The chat we will have is
:01:23. > :01:30.in the context of you being a key player in the financial meltdown of
:01:31. > :01:33.-07, '08 and the years after, so in that regard would you say today you
:01:34. > :01:39.feel that our political, economic leaders have a great deal more
:01:40. > :01:44.wisdom and insight than they had then? -- '07. I am not sure any of
:01:45. > :01:49.us have any more wisdom and insight. Some but not enough. It is
:01:50. > :01:53.very striking that eight years after the banking crisis was really ended
:01:54. > :01:58.as a banking crisis, the economic crisis has not. And the continued
:01:59. > :02:07.reliance on central banks to try to stimulate growth, it is certainly
:02:08. > :02:11.worth having but is not a sustainable recovery. And maybe not
:02:12. > :02:16.a sense of certainty that the system is more resilient, fundamentally
:02:17. > :02:20.stronger than it was back then. There are two aspects to this, one
:02:21. > :02:24.is the banking system and the other is the world economy. The banking
:02:25. > :02:28.system in Britain and the US is safer but not as safe as I would
:02:29. > :02:31.like it to be in the long run. The banking system elsewhere in the
:02:32. > :02:36.world is not as resilient as it needs to be. When you set recently
:02:37. > :02:41.without reform, fundamental reform, of the system, another crisis is
:02:42. > :02:44.certain, you are talking about the global system and you see the
:02:45. > :02:48.weaknesses not necessarily in New York and London but elsewhere. The
:02:49. > :02:54.banking system isn't general is prone to the problems we saw in
:02:55. > :02:58.2008. Where it will come is unclear. It is less likely to come in New
:02:59. > :03:01.York or London than it did then but it could happen anywhere else in the
:03:02. > :03:06.world. Wherever it happens it will impact on us. What people want to
:03:07. > :03:11.take from this is you say it will come. At some point. The banking
:03:12. > :03:14.system is still exposed to the possibility of people taking their
:03:15. > :03:18.money away from the banks and the bank is being unable to return the
:03:19. > :03:22.money. There is always the risk of a further crash in the banking system.
:03:23. > :03:26.It is not likely now because the banks are not as exposed as they
:03:27. > :03:32.were but they are still exposed to the possibility of a run. There are
:03:33. > :03:39.suggestions that this impending crisis might not be far away. The
:03:40. > :03:43.bank for international settlements in Switzerland, their chief intranet
:03:44. > :03:47.for hours pointed things he is concerned about, negative interest
:03:48. > :03:52.rates in Japan and parts of Europe, with the eurozone. He is suggesting,
:03:53. > :03:56.his words, not mine, this may not be a bolt from the blue but there are
:03:57. > :04:00.signs of a gathering storm that has been building for some time. Is that
:04:01. > :04:05.your sense? I have some sympathy for that view. I don't necessarily agree
:04:06. > :04:11.with the prescriptions that the bank has given. I do think that someone
:04:12. > :04:15.coming from Mars to look at the world economy would say, hang on, we
:04:16. > :04:21.have had the biggest monetary stimulus the world has ever seen and
:04:22. > :04:25.yet eight years on we have not seen recovery, so the answer cannot be
:04:26. > :04:32.more stimulus. In layman Stearns, what is it? You say the fundamental
:04:33. > :04:37.problem is not liquidity but solvency and I wonder what you mean
:04:38. > :04:42.by that in terms we can understand -- layman's terms. There is no
:04:43. > :04:48.immediate solvency in the American and UK system but in banks in China
:04:49. > :04:51.and Europe and emerging markets, loans have been made that won't be
:04:52. > :04:55.repaid to the extent that they are expected, hoped they will be. That
:04:56. > :05:02.means that they are vulnerable to losing money. And going bust.
:05:03. > :05:07.Reality bites. They will go bust. Indeed. The bigger problem is we
:05:08. > :05:11.were stuck in a position where we think that low interest rates are
:05:12. > :05:15.the answer. In the short run, low interest rates are like a
:05:16. > :05:20.painkiller. You give the painkiller to relieve the pain but it is not
:05:21. > :05:26.deal with the underlying system. -- does not deal. There is a major dis-
:05:27. > :05:29.equilibrium in the economy which requires changes in the countries
:05:30. > :05:35.that spend and save and we need to be able to get back to a world with
:05:36. > :05:38.higher interest rates so that there is an incentive to save in the
:05:39. > :05:42.economy, there is a mechanism for choosing between good and bad
:05:43. > :05:46.investment projects, we are a long way from that. You say we need to
:05:47. > :05:51.get there, what it is one thing to say it and another to have a
:05:52. > :05:54.prescription as to how. It isn't cutting interest rates in the long
:05:55. > :05:59.run to get back to higher rates. What about pumping new money into
:06:00. > :06:03.economies? Quantitive easing in the US and Europe. It has put billions
:06:04. > :06:07.in... It has and it was necessary in the short run to prevent the
:06:08. > :06:10.collapse of our economy and very peed off the great depression. We
:06:11. > :06:19.were going in the opposite direction than we needed to go. You need to do
:06:20. > :06:24.that. In the long run you need to encourage economies like ours and
:06:25. > :06:29.the US to save and invest and export more, and in Germany and China to do
:06:30. > :06:32.the opposite. And making that adjustment is difficult to do. We
:06:33. > :06:38.have made very little progress. That is quite an important but
:06:39. > :06:45.conventional analysis you've given me. In front of you, the tome you've
:06:46. > :06:49.written, you put a lot of thought into how capitalism works, it goes
:06:50. > :06:52.further than the specifics of economic management. You say, hang
:06:53. > :06:58.on, the fundamental sanctions we make our money and banks are wrong.
:06:59. > :07:02.You quote a Chinese central banker who said to you after the crash, you
:07:03. > :07:08.know what, the problem with you in the west is you don't understand
:07:09. > :07:13.money and banks, and you seem to have some sympathy with his view. I
:07:14. > :07:19.do. I asked him what he thought of Industrial Revolution 250 years on.
:07:20. > :07:23.He said to me, in China we've learnt a lot from the experience of the
:07:24. > :07:27.west. You can see the benefits of the market economy and competition,
:07:28. > :07:31.generating new products and raising living standards, fostering economic
:07:32. > :07:37.growth, and we are trying to emulate that. And then he paused and said,
:07:38. > :07:41.but I am not sure you got the idea on banking yet. He is right. A few
:07:42. > :07:46.years ago we had a massive bank run where the leading banks in New
:07:47. > :07:51.York, it would have happened in London as well and that is because
:07:52. > :07:54.we don't let banks take out, before operating as banks, sufficient
:07:55. > :08:01.insurance to make it easy for the central bank to provide liquidity,
:08:02. > :08:06.where they are in a crisis. To keep it simple and straightforward you
:08:07. > :08:09.seem to be saying that your radical shakeup of banking would require a
:08:10. > :08:12.much more conservative, may be old-fashioned approach to banking
:08:13. > :08:16.where the banks would have to put up much more collateral before they
:08:17. > :08:22.were allowed to exercise their right to lend and take risks with other
:08:23. > :08:25.people's money. Yes, so, it is like taking insurers, but it is not
:08:26. > :08:30.telling every bank it has to be conservative. It is like driving a
:08:31. > :08:33.car. If you want to drive a faster and more dangerous car you pay
:08:34. > :08:38.bigger insurance premiums. If banks want to make riskier lending, then
:08:39. > :08:41.they would have to pay a bigger insurers premium to the central
:08:42. > :08:47.bank. You are saying, if I may, the price on risk that banks live with
:08:48. > :08:53.today is nowhere near as high as it should be. We know that before the
:08:54. > :08:56.crisis banks paid no penalty or price for access to liquidity and
:08:57. > :09:00.money from the central banks when the crisis came. They were just
:09:01. > :09:04.bailed out. What we now need to do, and I don't eat it is politically
:09:05. > :09:09.difficult. We have gone some way towards it as a result of the crisis
:09:10. > :09:15.-- I don't think it is politically difficult. Banks now hold very much
:09:16. > :09:19.more liquid and save assets, like deposits with central banks, than
:09:20. > :09:22.they ever did before the crisis. They had more equity finance, which
:09:23. > :09:27.makes them safer. We've gone some way towards it but all the way. You
:09:28. > :09:32.are saying this now, obviously quite a few years after you were in the
:09:33. > :09:36.eye of the storm in 2007 and 2008. We had Ben Bernanke on the show not
:09:37. > :09:41.long ago and I pushed him for areas that he now could tell me he was
:09:42. > :09:44.regretful about and felt he had got wrong, he wasn't keen to go into
:09:45. > :09:50.that territory. I wonder about you and that this idea of mea culpa. I
:09:51. > :09:54.think a lot of people would like to hear that from those players at the
:09:55. > :09:57.heart of that crisis. They would like to hear some say they have got
:09:58. > :10:03.it terribly wrong and they are sorry. I don't think it is like that
:10:04. > :10:06.at all. This is more like nostra culpa where the economics profession
:10:07. > :10:12.should say, we did not realise the unexpected things will have such
:10:13. > :10:15.drastic impact. One of the questions that interesting is why did no one
:10:16. > :10:19.do anything about it when a lot of people could see that what was
:10:20. > :10:24.happening was unsustainable? All of us in the central banking world were
:10:25. > :10:29.speechless and said -- gave speeches saying there was far too much risk.
:10:30. > :10:34.This was obvious to everyone. No one had an incentive to do anything
:10:35. > :10:37.about it. You did. Just on this question of responsibility. You did
:10:38. > :10:42.issue some warnings about what you saw as a red light flashing. You
:10:43. > :10:47.said this in April 2007, you know what I will quote you, a Bank of
:10:48. > :10:50.England report said that the UK financial system remains highly
:10:51. > :10:56.resilient. And just a a few months later, one bank, Northern Rock, was
:10:57. > :11:00.going bust. One month after I gave that statement I gave it speech in
:11:01. > :11:05.which I said the financial system has always got into trouble when
:11:06. > :11:09.there is too much debt, there is too much debt, why is it we believe we
:11:10. > :11:14.are wiser than the financials of the past? -- made that statement. The
:11:15. > :11:20.Kholo financial products were lying at the heart of the problem that
:11:21. > :11:23.emerged in 2007 which was no one knew which bank was safe and which
:11:24. > :11:26.was not and so there were plenty of warnings but I don't want to blame
:11:27. > :11:31.anyone because if anyone bank had decided to get out of this business
:11:32. > :11:35.five years earlier they would have failed to make the profits which the
:11:36. > :11:39.other banks are making and then they would have almost certainly have
:11:40. > :11:41.been fired as a CEO long before we got to 2007 -- financiers. Equally
:11:42. > :11:48.if anyone central bank had said, look, interest rates are getting too
:11:49. > :11:51.low, let's keep them up, they would have certainly created recession in
:11:52. > :11:56.their own economy but not prevented a global downturn. So an important
:11:57. > :11:59.aspect of all of this is that no one had any real incentive on their own
:12:00. > :12:02.to do enough about it. I can see your point and that was certainly
:12:03. > :12:08.apply to the direct players in the game, that is bankers themselves and
:12:09. > :12:12.businesses. And central banks and governments. Then you look at the
:12:13. > :12:14.world makers, politicians, regulators, those overseeing the
:12:15. > :12:18.system, like you in the central bank, and then you have to ask
:12:19. > :12:21.whether they fulfil their responsibilities then, but more
:12:22. > :12:24.interestingly perhaps, because we don't want to spend too long on the
:12:25. > :12:28.past, whether they are today. And let me bring you to today and let me
:12:29. > :12:31.point you to the fact that many people think that the British
:12:32. > :12:35.Chancellor of the Exchequer, the finance minister, George Osborne,
:12:36. > :12:39.they wonder whether he, to coin a phrase, is allowing some backsliding
:12:40. > :12:43.on the reforms that were promised to the banking system in the UK. What
:12:44. > :12:46.do you think? A think the most important thing is we continue with
:12:47. > :12:50.the reforms that have been pushed and further them. So, Sir John Beck
:12:51. > :12:56.has has published proposals through his commission for making banks are
:12:57. > :12:59.safer, ring-fencing between banks that primarily serve retail
:13:00. > :13:03.customers and those who take risky transactions with wholesale
:13:04. > :13:07.customers, that is proceeding -- Vickers. Banks hold more capital. I
:13:08. > :13:10.would like to see us go further in that direction over ten or 20 years.
:13:11. > :13:15.Let me list you a couple of things. The annual bank levy has been made
:13:16. > :13:18.less onerous on large international bank. The Financial Conduct
:13:19. > :13:21.Authority scrapped an enquiry into banking culture which the Chancellor
:13:22. > :13:26.promised. These are again to use the phrase straws in the wind. It
:13:27. > :13:31.suggests the Chancellor is easing the pressure on those bankers. What
:13:32. > :13:34.I care about is that we have simple but effective regulation and I am
:13:35. > :13:39.worried that we are making the regulatory system is so complex that
:13:40. > :13:43.it would be rather ineffective. To be honest I don't really think that
:13:44. > :13:46.some commission on culture in banks is going to be terribly effective.
:13:47. > :13:50.Don't you still accept that there are millions of people not just in
:13:51. > :13:54.this country but around the world who feel that, you know what, we
:13:55. > :13:58.paid a massive price for this meltdown that happen, the bankers
:13:59. > :14:02.themselves didn't, and this hazard question hasn't been resolved, and
:14:03. > :14:06.the issue of banker bonuses and ridiculous levels of pay have not
:14:07. > :14:08.been resolved. There are too many incentives still for rest of it
:14:09. > :14:12.taken and people want that addressed. They do and I think the
:14:13. > :14:17.proposals I set out in my book will do it in a much more effective and
:14:18. > :14:21.simple way. Because, rather than just trying to issue warnings to
:14:22. > :14:26.drivers or prosecute people, to force people to take out enjoins
:14:27. > :14:30.upfront before they can drive up with the insurance premium they pay
:14:31. > :14:33.reflects the dangers of the car they are driving is a much more effective
:14:34. > :14:38.way of doing it and what I want to do is to make sure that banks have
:14:39. > :14:43.to take out the insurance upfront so that everyone will know that if they
:14:44. > :14:46.get into trouble they were positioned in enough collateral so
:14:47. > :14:49.the central bank can afford to pay out to the banks the money they need
:14:50. > :14:53.to repay the depositors -- where. And if they do that the banks will
:14:54. > :14:55.not be in a position to pay out extravagant bonuses ought to do many
:14:56. > :15:08.other things that we It is partly political and about
:15:09. > :15:12.perceptions, seeing who paid a price and how the system changed. Vince
:15:13. > :15:16.cable used to be is in a secretary and said this is a dangerous time
:15:17. > :15:20.right now, and he was thinking about George Osborne and the idea of
:15:21. > :15:26.backsliding, occurs when there is no immediate threat to the system,
:15:27. > :15:30.pressure goes off, that practices creep in, and abuse in the banking
:15:31. > :15:33.side creeps in, and banks meant longer feel under pressure from
:15:34. > :15:39.politicians. Maybe that is where we are again today. We're moving
:15:40. > :15:45.towards it, but would say the difficulty with saying bad practices
:15:46. > :15:48.are creeping in, in those times, people don't think they are bad
:15:49. > :15:53.practices. There they are taking excessive risks. That is why I want
:15:54. > :15:58.a system in which the central bank has a key role to play in ensuring
:15:59. > :16:02.its banks take certain actions and they have to put aside enough
:16:03. > :16:05.insurance to deal with the eventuality things go wrong. That
:16:06. > :16:10.will be ultimately the only thing that will convince people the
:16:11. > :16:14.banking system is safe. I understand the anger, and it is justifiable.
:16:15. > :16:18.Rather than just deal with the sentence of the anger, we need to go
:16:19. > :16:23.back to the underlying causes of it. One more thought about the anger,
:16:24. > :16:28.and it is a philosophical question for you, do you think it is part of
:16:29. > :16:32.the duty of a central bank chief like you were to think not just
:16:33. > :16:39.about your key targets, like inflation levels in the nation, but
:16:40. > :16:44.also to think about inequality and about how those on average or below
:16:45. > :16:50.average wages feel about the way the economic system works for them? It
:16:51. > :16:53.is certainly part of the duty of a central banker to care and think
:16:54. > :16:59.about the concerns of most people, and the way to do that is to go out
:17:00. > :17:03.and given the task the Parliament has given us, this is what we are
:17:04. > :17:07.doing to address your concerns. I don't dig a central bank should take
:17:08. > :17:11.it upon itself to make announcements on areas where Parliament has not
:17:12. > :17:15.given the authority to act -- I don't think. That is a democratic
:17:16. > :17:20.approach, and the most important thing is to medication. When I was
:17:21. > :17:23.governor I spend a lot of time getting out of London and going
:17:24. > :17:28.around the whole of the United Kingdom talking to people who live
:17:29. > :17:32.there, businesses, trade unions, took Spain what the Bank of England
:17:33. > :17:39.was trying to do and why it would help them ultimately. That is our
:17:40. > :17:42.task. It certainly is not to pontificate on things which are not
:17:43. > :17:47.the responsibility of the Bank of England. Right. Let's think about
:17:48. > :17:52.Europe for a moment. I want to get to the issue of Brexit in a second.
:17:53. > :17:56.Britons will vote on whether to leave the EU in summer. It raises
:17:57. > :18:02.the question of whether the European economy works and whether the
:18:03. > :18:05.eurozone in particular has, in a sense, but a straitjacket around
:18:06. > :18:11.your's economy. You have always sounded very sceptical about the
:18:12. > :18:16.eurozone. I am, and I think it was a mistake. I figure was carried out
:18:17. > :18:19.for the best of motives. In particular, Germany consciously went
:18:20. > :18:24.out of its way to bind itself into Europe, to give up its sovereignty
:18:25. > :18:29.and to say no, we want to share this with the rest of Europe so in future
:18:30. > :18:32.you will no longer be afraid of a large and powerful Germany. It is
:18:33. > :18:37.since the convergence of European economic performance has not
:18:38. > :18:42.happened. The tragedy is the objective of Germany to reduce the
:18:43. > :18:46.fear of other countries in Europe of Germany's economic and political
:18:47. > :18:52.power is totally backfired. Using the eurozone is bound to collapse?
:18:53. > :18:56.No, I don't get is bound to collapse because there is a much political
:18:57. > :19:00.will to keep it going, and it is a battle between economic arithmetic
:19:01. > :19:03.and that political will. The economic logic is that the eurozone
:19:04. > :19:09.in its current form should not exist in the future. It would be certainly
:19:10. > :19:13.that if it hadn't started and will be better in the longer run if
:19:14. > :19:17.people gave serious thought to how it could gradually be dismantled, at
:19:18. > :19:20.least among the current members. I find that a fascinating answer
:19:21. > :19:24.because it suggests to me you believe there will be long-term and
:19:25. > :19:29.unavoidable chaos inside the European Union. Some member states
:19:30. > :19:34.aren't in it, but the eurozone is the most central pillar of the
:19:35. > :19:38.European Union. If you think it is in some ways facing inevitable
:19:39. > :19:42.change if not collapse, would it not be better for Britain to
:19:43. > :19:47.disassociate itself from this entire mess and get out of the European
:19:48. > :19:51.Union? That does not follow it at all, because we not numbers of the
:19:52. > :19:56.eurozone and the Prime Minister has radically... Even if you are not a
:19:57. > :19:59.member, the European Union will be consumed over the next decade with
:20:00. > :20:05.the crisis in the eurozone. Would not be better to get out? That is a
:20:06. > :20:09.different question, and whether we stay in the European Union or leave
:20:10. > :20:13.it, we are going to be affected by what happens in the eurozone, and
:20:14. > :20:19.that is one of the concerns I have. We'd be more seriously damaged eye
:20:20. > :20:25.being inside the club? We have the option in June to leave the club.
:20:26. > :20:28.But I don't figure will make a big difference to the problems in the
:20:29. > :20:33.eurozone on the United Kingdom. We are a trading partner, it and that
:20:34. > :20:39.will remain true whether we stay or leave the European Union. How will
:20:40. > :20:44.you vote? I haven't made up my mind. For you, it is a cliffhanger. What I
:20:45. > :20:48.find depressing about the current debate is that everyone seems to
:20:49. > :20:53.think it is utterly obvious what the answer is, but half of them seem to
:20:54. > :20:57.think we should stay and half seem to think we should leave. What I
:20:58. > :21:03.find is when I meet people, they don't ask me do you think we should
:21:04. > :21:07.stay or do you think we should leave? They don't want to be told or
:21:08. > :21:10.advised by the former governor of the Bank of England or for that
:21:11. > :21:14.matter anybody else. What they really want is to be given the
:21:15. > :21:22.arguments and the fax select make up their own minds. And I do think it
:21:23. > :21:28.is very important people should be able to make up their own minds, and
:21:29. > :21:33.if the campaign takes the form of slogans and it is a PR campaign,
:21:34. > :21:37.they can't do that. The government in the form of David Cameron and
:21:38. > :21:41.George Osborne have over the last couple of weeks established a
:21:42. > :21:46.message which says it would be a massive and grave risk to the future
:21:47. > :21:50.of the UK economy to vote to get out of the European Union. You are
:21:51. > :21:53.saying for you, the judgement is much more finely balanced than
:21:54. > :21:57.that, and therefore you couldn't agree with them. It is hard to know
:21:58. > :22:02.whether it is finely balanced without knowing all of the judgement
:22:03. > :22:07.and fax. What we're seeing at present is that one can say is if we
:22:08. > :22:12.leave the European Union, we will be a land of milk and honey. The other
:22:13. > :22:19.camp says no, if we leave, we will be a land of locusts and place.
:22:20. > :22:25.Neither of these positions are plausible -- plagues. It would be
:22:26. > :22:28.better if we had a campaign that said I can see merit in your
:22:29. > :22:31.argument, I don't agree for the following reasons, pick up the back
:22:32. > :22:41.of years we should either stay or leave. I would hope the ABC and
:22:42. > :22:52.others will play a role. -- BBC. Mark Carney has talked about what he
:22:53. > :22:58.called the risk premium that will come with a vote to leave. On that
:22:59. > :23:03.specific point, if Britain voted to leave, how much uncertainty and
:23:04. > :23:08.damage and would that be? I don't know. It will be hard to judge. I
:23:09. > :23:13.want second-guess Mark Carney. He is the governor and I'm not. What I
:23:14. > :23:18.would say is the important thing, and I'm sure Mark Carney himself
:23:19. > :23:22.would not get drawn into a political issue like this, we need more people
:23:23. > :23:27.who will calmly set out all of the facts and arguments. We have four
:23:28. > :23:32.months of this referendum. Surely we should use the four months to have a
:23:33. > :23:36.proper debate and make up our minds. We can't face four months of an
:23:37. > :23:41.advertising campaign on both sides. The final question would be why,
:23:42. > :23:44.given everything we talked about from the financial global crash to
:23:45. > :23:50.the Brexit, why anybody would take the advice of economists any more.
:23:51. > :23:55.We have to acknowledge that they often get things wrong. Any future
:23:56. > :24:00.is inherently unknowable. I don't think people should vote one way or
:24:01. > :24:04.another because of the advice of economists or industrialists or
:24:05. > :24:07.bankers. Or anybody who stands up and says I signed a petition, you
:24:08. > :24:13.had better listen to this because this is my view. Lord King, for now,
:24:14. > :24:34.thank you for being on high told -- HARDtalk. My pleasure.
:24:35. > :24:36.Milder weather on the way later this week.
:24:37. > :24:41.We are not there yet, with many of us starting Tuesday with a frost