Lord Mervyn King, governor of the Bank of England, 2003-2013 HARDtalk

You up-to-date on the headlines. It is time now for HARDtalk.

Welcome to HARDtalk, I am Stephen Sackur. How sound are the

foundations of the world economy? Eight years after the financial

meltdown which rocked global capitalism, the answer seems to be,

they are disturbingly fragile. That is the view of my guess today,

economist and former governor of the bank of ignorant, England, Mervyn

King. He was a player saving the banking system from terminal

collapse in the dark days of '08 and says another great crisis is looming

and less, well, unless what? -- Bank of England.

Lord King, welcome to HARDtalk. Thank you. The chat we will have is

in the context of you being a key player in the financial meltdown of

-07, '08 and the years after, so in that regard would you say today you

feel that our political, economic leaders have a great deal more

wisdom and insight than they had then? -- '07. I am not sure any of

us have any more wisdom and insight. Some but not enough. It is

very striking that eight years after the banking crisis was really ended

as a banking crisis, the economic crisis has not. And the continued

reliance on central banks to try to stimulate growth, it is certainly

worth having but is not a sustainable recovery. And maybe not

a sense of certainty that the system is more resilient, fundamentally

stronger than it was back then. There are two aspects to this, one

is the banking system and the other is the world economy. The banking

system in Britain and the US is safer but not as safe as I would

like it to be in the long run. The banking system elsewhere in the

world is not as resilient as it needs to be. When you set recently

without reform, fundamental reform, of the system, another crisis is

certain, you are talking about the global system and you see the

weaknesses not necessarily in New York and London but elsewhere. The

banking system isn't general is prone to the problems we saw in

2008. Where it will come is unclear. It is less likely to come in New

York or London than it did then but it could happen anywhere else in the

world. Wherever it happens it will impact on us. What people want to

take from this is you say it will come. At some point. The banking

system is still exposed to the possibility of people taking their

money away from the banks and the bank is being unable to return the

money. There is always the risk of a further crash in the banking system.

It is not likely now because the banks are not as exposed as they

were but they are still exposed to the possibility of a run. There are

suggestions that this impending crisis might not be far away. The

bank for international settlements in Switzerland, their chief intranet

for hours pointed things he is concerned about, negative interest

rates in Japan and parts of Europe, with the eurozone. He is suggesting,

his words, not mine, this may not be a bolt from the blue but there are

signs of a gathering storm that has been building for some time. Is that

your sense? I have some sympathy for that view. I don't necessarily agree

with the prescriptions that the bank has given. I do think that someone

coming from Mars to look at the world economy would say, hang on, we

have had the biggest monetary stimulus the world has ever seen and

yet eight years on we have not seen recovery, so the answer cannot be

more stimulus. In layman Stearns, what is it? You say the fundamental

problem is not liquidity but solvency and I wonder what you mean

by that in terms we can understand -- layman's terms. There is no

immediate solvency in the American and UK system but in banks in China

and Europe and emerging markets, loans have been made that won't be

repaid to the extent that they are expected, hoped they will be. That

means that they are vulnerable to losing money. And going bust.

Reality bites. They will go bust. Indeed. The bigger problem is we

were stuck in a position where we think that low interest rates are

the answer. In the short run, low interest rates are like a

painkiller. You give the painkiller to relieve the pain but it is not

deal with the underlying system. -- does not deal. There is a major dis-

equilibrium in the economy which requires changes in the countries

that spend and save and we need to be able to get back to a world with

higher interest rates so that there is an incentive to save in the

economy, there is a mechanism for choosing between good and bad

investment projects, we are a long way from that. You say we need to

get there, what it is one thing to say it and another to have a

prescription as to how. It isn't cutting interest rates in the long

run to get back to higher rates. What about pumping new money into

economies? Quantitive easing in the US and Europe. It has put billions

in... It has and it was necessary in the short run to prevent the

collapse of our economy and very peed off the great depression. We

were going in the opposite direction than we needed to go. You need to do

that. In the long run you need to encourage economies like ours and

the US to save and invest and export more, and in Germany and China to do

the opposite. And making that adjustment is difficult to do. We

have made very little progress. That is quite an important but

conventional analysis you've given me. In front of you, the tome you've

written, you put a lot of thought into how capitalism works, it goes

further than the specifics of economic management. You say, hang

on, the fundamental sanctions we make our money and banks are wrong.

You quote a Chinese central banker who said to you after the crash, you

know what, the problem with you in the west is you don't understand

money and banks, and you seem to have some sympathy with his view. I

do. I asked him what he thought of Industrial Revolution 250 years on.

He said to me, in China we've learnt a lot from the experience of the

west. You can see the benefits of the market economy and competition,

generating new products and raising living standards, fostering economic

growth, and we are trying to emulate that. And then he paused and said,

but I am not sure you got the idea on banking yet. He is right. A few

years ago we had a massive bank run where the leading banks in New

York, it would have happened in London as well and that is because

we don't let banks take out, before operating as banks, sufficient

insurance to make it easy for the central bank to provide liquidity,

where they are in a crisis. To keep it simple and straightforward you

seem to be saying that your radical shakeup of banking would require a

much more conservative, may be old-fashioned approach to banking

where the banks would have to put up much more collateral before they

were allowed to exercise their right to lend and take risks with other

people's money. Yes, so, it is like taking insurers, but it is not

telling every bank it has to be conservative. It is like driving a

car. If you want to drive a faster and more dangerous car you pay

bigger insurance premiums. If banks want to make riskier lending, then

they would have to pay a bigger insurers premium to the central

bank. You are saying, if I may, the price on risk that banks live with

today is nowhere near as high as it should be. We know that before the

crisis banks paid no penalty or price for access to liquidity and

money from the central banks when the crisis came. They were just

bailed out. What we now need to do, and I don't eat it is politically

difficult. We have gone some way towards it as a result of the crisis

-- I don't think it is politically difficult. Banks now hold very much

more liquid and save assets, like deposits with central banks, than

they ever did before the crisis. They had more equity finance, which

makes them safer. We've gone some way towards it but all the way. You

are saying this now, obviously quite a few years after you were in the

eye of the storm in 2007 and 2008. We had Ben Bernanke on the show not

long ago and I pushed him for areas that he now could tell me he was

regretful about and felt he had got wrong, he wasn't keen to go into

that territory. I wonder about you and that this idea of mea culpa. I

think a lot of people would like to hear that from those players at the

heart of that crisis. They would like to hear some say they have got

it terribly wrong and they are sorry. I don't think it is like that

at all. This is more like nostra culpa where the economics profession

should say, we did not realise the unexpected things will have such

drastic impact. One of the questions that interesting is why did no one

do anything about it when a lot of people could see that what was

happening was unsustainable? All of us in the central banking world were

speechless and said -- gave speeches saying there was far too much risk.

This was obvious to everyone. No one had an incentive to do anything

about it. You did. Just on this question of responsibility. You did

issue some warnings about what you saw as a red light flashing. You

said this in April 2007, you know what I will quote you, a Bank of

England report said that the UK financial system remains highly

resilient. And just a a few months later, one bank, Northern Rock, was

going bust. One month after I gave that statement I gave it speech in

which I said the financial system has always got into trouble when

there is too much debt, there is too much debt, why is it we believe we

are wiser than the financials of the past? -- made that statement. The

Kholo financial products were lying at the heart of the problem that

emerged in 2007 which was no one knew which bank was safe and which

was not and so there were plenty of warnings but I don't want to blame

anyone because if anyone bank had decided to get out of this business

five years earlier they would have failed to make the profits which the

other banks are making and then they would have almost certainly have

been fired as a CEO long before we got to 2007 -- financiers. Equally

if anyone central bank had said, look, interest rates are getting too

low, let's keep them up, they would have certainly created recession in

their own economy but not prevented a global downturn. So an important

aspect of all of this is that no one had any real incentive on their own

to do enough about it. I can see your point and that was certainly

apply to the direct players in the game, that is bankers themselves and

businesses. And central banks and governments. Then you look at the

world makers, politicians, regulators, those overseeing the

system, like you in the central bank, and then you have to ask

whether they fulfil their responsibilities then, but more

interestingly perhaps, because we don't want to spend too long on the

past, whether they are today. And let me bring you to today and let me

point you to the fact that many people think that the British

Chancellor of the Exchequer, the finance minister, George Osborne,

they wonder whether he, to coin a phrase, is allowing some backsliding

on the reforms that were promised to the banking system in the UK. What

do you think? A think the most important thing is we continue with

the reforms that have been pushed and further them. So, Sir John Beck

has has published proposals through his commission for making banks are

safer, ring-fencing between banks that primarily serve retail

customers and those who take risky transactions with wholesale

customers, that is proceeding -- Vickers. Banks hold more capital. I

would like to see us go further in that direction over ten or 20 years.

Let me list you a couple of things. The annual bank levy has been made

less onerous on large international bank. The Financial Conduct

Authority scrapped an enquiry into banking culture which the Chancellor

promised. These are again to use the phrase straws in the wind. It

suggests the Chancellor is easing the pressure on those bankers. What

I care about is that we have simple but effective regulation and I am

worried that we are making the regulatory system is so complex that

it would be rather ineffective. To be honest I don't really think that

some commission on culture in banks is going to be terribly effective.

Don't you still accept that there are millions of people not just in

this country but around the world who feel that, you know what, we

paid a massive price for this meltdown that happen, the bankers

themselves didn't, and this hazard question hasn't been resolved, and

the issue of banker bonuses and ridiculous levels of pay have not

been resolved. There are too many incentives still for rest of it

taken and people want that addressed. They do and I think the

proposals I set out in my book will do it in a much more effective and

simple way. Because, rather than just trying to issue warnings to

drivers or prosecute people, to force people to take out enjoins

upfront before they can drive up with the insurance premium they pay

reflects the dangers of the car they are driving is a much more effective

way of doing it and what I want to do is to make sure that banks have

to take out the insurance upfront so that everyone will know that if they

get into trouble they were positioned in enough collateral so

the central bank can afford to pay out to the banks the money they need

to repay the depositors -- where. And if they do that the banks will

not be in a position to pay out extravagant bonuses ought to do many

other things that we It is partly political and about

perceptions, seeing who paid a price and how the system changed. Vince

cable used to be is in a secretary and said this is a dangerous time

right now, and he was thinking about George Osborne and the idea of

backsliding, occurs when there is no immediate threat to the system,

pressure goes off, that practices creep in, and abuse in the banking

side creeps in, and banks meant longer feel under pressure from

politicians. Maybe that is where we are again today. We're moving

towards it, but would say the difficulty with saying bad practices

are creeping in, in those times, people don't think they are bad

practices. There they are taking excessive risks. That is why I want

a system in which the central bank has a key role to play in ensuring

its banks take certain actions and they have to put aside enough

insurance to deal with the eventuality things go wrong. That

will be ultimately the only thing that will convince people the

banking system is safe. I understand the anger, and it is justifiable.

Rather than just deal with the sentence of the anger, we need to go

back to the underlying causes of it. One more thought about the anger,

and it is a philosophical question for you, do you think it is part of

the duty of a central bank chief like you were to think not just

about your key targets, like inflation levels in the nation, but

also to think about inequality and about how those on average or below

average wages feel about the way the economic system works for them? It

is certainly part of the duty of a central banker to care and think

about the concerns of most people, and the way to do that is to go out

and given the task the Parliament has given us, this is what we are

doing to address your concerns. I don't dig a central bank should take

it upon itself to make announcements on areas where Parliament has not

given the authority to act -- I don't think. That is a democratic

approach, and the most important thing is to medication. When I was

governor I spend a lot of time getting out of London and going

around the whole of the United Kingdom talking to people who live

there, businesses, trade unions, took Spain what the Bank of England

was trying to do and why it would help them ultimately. That is our

task. It certainly is not to pontificate on things which are not

the responsibility of the Bank of England. Right. Let's think about

Europe for a moment. I want to get to the issue of Brexit in a second.

Britons will vote on whether to leave the EU in summer. It raises

the question of whether the European economy works and whether the

eurozone in particular has, in a sense, but a straitjacket around

your's economy. You have always sounded very sceptical about the

eurozone. I am, and I think it was a mistake. I figure was carried out

for the best of motives. In particular, Germany consciously went

out of its way to bind itself into Europe, to give up its sovereignty

and to say no, we want to share this with the rest of Europe so in future

you will no longer be afraid of a large and powerful Germany. It is

since the convergence of European economic performance has not

happened. The tragedy is the objective of Germany to reduce the

fear of other countries in Europe of Germany's economic and political

power is totally backfired. Using the eurozone is bound to collapse?

No, I don't get is bound to collapse because there is a much political

will to keep it going, and it is a battle between economic arithmetic

and that political will. The economic logic is that the eurozone

in its current form should not exist in the future. It would be certainly

that if it hadn't started and will be better in the longer run if

people gave serious thought to how it could gradually be dismantled, at

least among the current members. I find that a fascinating answer

because it suggests to me you believe there will be long-term and

unavoidable chaos inside the European Union. Some member states

aren't in it, but the eurozone is the most central pillar of the

European Union. If you think it is in some ways facing inevitable

change if not collapse, would it not be better for Britain to

disassociate itself from this entire mess and get out of the European

Union? That does not follow it at all, because we not numbers of the

eurozone and the Prime Minister has radically... Even if you are not a

member, the European Union will be consumed over the next decade with

the crisis in the eurozone. Would not be better to get out? That is a

different question, and whether we stay in the European Union or leave

it, we are going to be affected by what happens in the eurozone, and

that is one of the concerns I have. We'd be more seriously damaged eye

being inside the club? We have the option in June to leave the club.

But I don't figure will make a big difference to the problems in the

eurozone on the United Kingdom. We are a trading partner, it and that

will remain true whether we stay or leave the European Union. How will

you vote? I haven't made up my mind. For you, it is a cliffhanger. What I

find depressing about the current debate is that everyone seems to

think it is utterly obvious what the answer is, but half of them seem to

think we should stay and half seem to think we should leave. What I

find is when I meet people, they don't ask me do you think we should

stay or do you think we should leave? They don't want to be told or

advised by the former governor of the Bank of England or for that

matter anybody else. What they really want is to be given the

arguments and the fax select make up their own minds. And I do think it

is very important people should be able to make up their own minds, and

if the campaign takes the form of slogans and it is a PR campaign,

they can't do that. The government in the form of David Cameron and

George Osborne have over the last couple of weeks established a

message which says it would be a massive and grave risk to the future

of the UK economy to vote to get out of the European Union. You are

saying for you, the judgement is much more finely balanced than

that, and therefore you couldn't agree with them. It is hard to know

whether it is finely balanced without knowing all of the judgement

and fax. What we're seeing at present is that one can say is if we

leave the European Union, we will be a land of milk and honey. The other

camp says no, if we leave, we will be a land of locusts and place.

Neither of these positions are plausible -- plagues. It would be

better if we had a campaign that said I can see merit in your

argument, I don't agree for the following reasons, pick up the back

of years we should either stay or leave. I would hope the ABC and

others will play a role. -- BBC. Mark Carney has talked about what he

called the risk premium that will come with a vote to leave. On that

specific point, if Britain voted to leave, how much uncertainty and

damage and would that be? I don't know. It will be hard to judge. I

want second-guess Mark Carney. He is the governor and I'm not. What I

would say is the important thing, and I'm sure Mark Carney himself

would not get drawn into a political issue like this, we need more people

who will calmly set out all of the facts and arguments. We have four

months of this referendum. Surely we should use the four months to have a

proper debate and make up our minds. We can't face four months of an

advertising campaign on both sides. The final question would be why,

given everything we talked about from the financial global crash to

the Brexit, why anybody would take the advice of economists any more.

We have to acknowledge that they often get things wrong. Any future

is inherently unknowable. I don't think people should vote one way or

another because of the advice of economists or industrialists or

bankers. Or anybody who stands up and says I signed a petition, you

had better listen to this because this is my view. Lord King, for now,

thank you for being on high told -- HARDtalk. My pleasure.

Milder weather on the way later this week.

We are not there yet, with many of us starting Tuesday with a frost