:00:00. > :00:51.Sharapova after she failed a drug stressed. -- a drugs test.
:00:52. > :00:53.How sound are the foundations of the world economy?
:00:54. > :00:55.Eight years after the financial meltdown which rocked global
:00:56. > :00:58.capitalism, the answer seems to be they are disturbingly fragile.
:00:59. > :01:00.At least, that is the view of my guest today, renowned
:01:01. > :01:02.economist and former Governor of the Bank of England,
:01:03. > :01:06.He was a key player in efforts to save
:01:07. > :01:08.the banking system from terminal collapse in those dark days of 2008.
:01:09. > :01:11.Now, he says another great crisis is looming unless,
:01:12. > :01:19.I think the chat we will have is very much in the context
:01:20. > :01:21.of you being a key player in the financial meltdown
:01:22. > :01:31.of 2007-2008 and the few years after.
:01:32. > :01:33.In that regard, would you say that today you feel
:01:34. > :01:36.our political and economic leaders have a great deal more wisdom
:01:37. > :01:43.Well, I'm not sure of any of us have a
:01:44. > :01:50.It is very striking that eight years after
:01:51. > :02:01.the banking crisis really was ended as a banking crisis,
:02:02. > :02:05.The continued reliance on central banks to try to stimulate growth,
:02:06. > :02:07.it's certainly worth having, but it isn't generating
:02:08. > :02:10.Not a sustainable recovery, and maybe not
:02:11. > :02:13.even a sense of certainty that the system is more resilient,
:02:14. > :02:14.fundamentally stronger, than it was back then.
:02:15. > :02:18.One is the banking system and the other is the world economy.
:02:19. > :02:22.The banking system in Britain and the
:02:23. > :02:25.United States is certainly safer, but not as safe as I would like it
:02:26. > :02:29.The banking system elsewhere in the world is certainly not
:02:30. > :02:33.When you said recently, without reform of the financial
:02:34. > :02:41.system, fundamental reform, another crisis is certain,
:02:42. > :02:42.you're talking about the global system.
:02:43. > :02:44.You see the fundamental weaknesses as being not
:02:45. > :02:46.in New York and London but somewhere else?
:02:47. > :02:49.The banking system in general is still prone to the sort
:02:50. > :02:55.It's less likely to come in New York or London
:02:56. > :02:58.than it did then, but it could happen anywhere else
:02:59. > :03:02.Wherever it happens, it will impact on us.
:03:03. > :03:05.I guess what people want to take from this is, you are saying,
:03:06. > :03:14.The banking system is still exposed to the possibility of people
:03:15. > :03:16.taking their money away from the banks and the banks
:03:17. > :03:27.The result is the risk of a further crash in the banking system,
:03:28. > :03:30.and it's not likely now, because the banks are not as exposed
:03:31. > :03:33.as they were, but they are still exposed to the possibility
:03:34. > :03:36.There are straws in the wind that suggest that this
:03:37. > :03:38.impending crisis might not be that far away.
:03:39. > :03:43.The Bank for International Settlement in Switzerland,
:03:44. > :03:46.their chief, just in last 24 hours, has pointed to some things
:03:47. > :03:49.concerned about - the prevalence of negative interest rates,
:03:50. > :03:51.for example, in Japan and parts of the
:03:52. > :03:53.Eurozone, he's suggesting, his words, not mine,
:03:54. > :03:56.this may not be a bolt from the blue, but there are signs
:03:57. > :03:59.of a gathering storm that has been building for some time.
:04:00. > :04:04.I don't necessarily agree with the descriptions that the bank
:04:05. > :04:07.for International Settlement has given.
:04:08. > :04:10.I do think that someone coming from Mars to look at our world
:04:11. > :04:13.economy would say, hang on, we have had the biggest monetary
:04:14. > :04:15.stimulus the world has ever seen, and yet, eight years
:04:16. > :04:19.Surely, the answer can't be more monetary
:04:20. > :04:32.You say the fundamental problem isn't liquidity, it's insolvency.
:04:33. > :04:35.I wonder what you really mean by that in terms that people
:04:36. > :04:42.I think there isn't a problem today is insolvency in the British
:04:43. > :04:56.Banks in Europe, in China and other emerging markets,
:04:57. > :04:59.have taken loans that will not be repaid to the extent
:05:00. > :05:01.That means they are vulnerable to losing
:05:02. > :05:09.But the bigger problem in the world economy is that we got stuck
:05:10. > :05:11.in a position where we think that very
:05:12. > :05:13.low interest rates are the answer, and in the short run,
:05:14. > :05:17.You give the painkiller to relieve the pain,
:05:18. > :05:19.but it doesn't deal with the underlying symptoms.
:05:20. > :05:21.We got ourselves into a position where
:05:22. > :05:24.there was a major disequilibrium, as I call it, in the world economy,
:05:25. > :05:26.which will require changes in the countries
:05:27. > :05:33.We need to get back to a world with higher interest rates
:05:34. > :05:35.where there is an incentive to saving economies,
:05:36. > :05:37.there is a mechanism for choosing between good
:05:38. > :05:43.You say we need to get there, but it is one
:05:44. > :05:46.thing saying it, it is another having a prescription as to how.
:05:47. > :05:49.It isn't cutting interest rates, when
:05:50. > :05:52.you need in the long run to get back to higher rates.
:05:53. > :05:53.What about pumping new money into economies,
:05:54. > :05:57.the quantitive easing we have seen in the United States and Europe,
:05:58. > :06:02.In the short run, it was necessary to prevent a collapse
:06:03. > :06:04.of our economies and a repeat of the Great
:06:05. > :06:10.But we were going in the opposite direction to where we needed to go
:06:11. > :06:13.Sometimes, you need to do that to create the painkiller,
:06:14. > :06:15.but in the long run, we need to encourage some
:06:16. > :06:18.economies, like ours and that in the United States,
:06:19. > :06:20.to save more, invest more and export more,
:06:21. > :06:23.and economies in Germany and China to do the opposite.
:06:24. > :06:27.Making that adjustment is difficult to do, but we've made very
:06:28. > :06:30.In a sense, that's quite an important but
:06:31. > :06:35.conventional economic analysis you've just given me,
:06:36. > :06:38.but that tome in front of you, which is the book you've written
:06:39. > :06:40.after a lot of thought about the way capitalism works,
:06:41. > :06:43.goes a great deal further than just sort
:06:44. > :06:45.of the specifics of economic management.
:06:46. > :06:47.You say, hang on a minute, some of the fundamental
:06:48. > :06:49.assumptions we make about money and about banks are wrong,
:06:50. > :06:56.and you quote a Chinese central banker who said,
:06:57. > :07:02.I think after the crash, the problem with you in the West is,
:07:03. > :07:05.you don't really understand money and banks.
:07:06. > :07:08.And you seem to have some sympathy with his view.
:07:09. > :07:14.I do, because I asked him what he thought of the Industrial Revolution
:07:15. > :07:18.250 years on, and he said me, we in China have learnt a lot
:07:19. > :07:22.They can see the benefits of a market economy,
:07:23. > :07:24.competition, in generating new products, raising
:07:25. > :07:27.living standards, fostering economic growth, and we're trying to emulate
:07:28. > :07:33.Then he paused and said, I'm not sure you've got the hang
:07:34. > :07:36.And he's right, because only a few years ago,
:07:37. > :07:39.we had a massive bank run in the leading banks in New York,
:07:40. > :07:41.and it would've happened in London, too,
:07:42. > :07:46.We don't make banks take out sufficient insurance before
:07:47. > :07:48.they start operating to make it easier for the central bank
:07:49. > :07:50.to provide liquidity when they are in a
:07:51. > :07:58.To keep this simple and straightforward,
:07:59. > :08:01.you seem to be saying that your radical shake-up
:08:02. > :08:05.of banking would require a much more conservative,
:08:06. > :08:10.maybe old-fashioned, approach the banking,
:08:11. > :08:12.where the banks would have to put up much more
:08:13. > :08:15.collateral before they were allowed to exercise their right to lend
:08:16. > :08:18.and take risks with other people's money.
:08:19. > :08:22.Yes, so it is like taking insurance, but it is not telling
:08:23. > :08:25.every bank it has to be conservative.
:08:26. > :08:30.If you want to drive a faster and more dangerous car,
:08:31. > :08:35.If banks want to make riskier lending, then they would have to pay
:08:36. > :08:43.You're saying, if I may, the price on risk that banks
:08:44. > :09:52.live with today is nowhere near as high as it should be.
:09:53. > :09:55.We know that before the crisis the banks paid no
:09:56. > :09:57.penalty or price for access to liquidity and money
:09:58. > :09:59.from the central banks when the crisis came.
:10:00. > :10:03.What we now need to do, and I don't think it is difficult
:10:04. > :10:06.now, we have gone some way towards it as a result
:10:07. > :10:10.liquid assets by putting deposits with central banks than they ever
:10:11. > :10:15.makes them safer, so we have gone some way towards it,
:10:16. > :10:18.You are saying this now, obviously a few years
:10:19. > :10:21.after you were in the eye of the storm in 2007 and 2008.
:10:22. > :10:25.We had Ben Bernanke on the show recently and when I pushed him
:10:26. > :10:27.on areas where he could now tell me he was regretful,
:10:28. > :10:30.that he got wrong, he was not keen to go into that territory.
:10:31. > :10:33.I wonder about you and this idea of mea culpa.
:10:34. > :10:36.I think a lot of people would like to hear that from those
:10:37. > :10:45.They would like to hear someone say, you know what, I got it wrong
:10:46. > :10:47.But actually, no one had an incentive to
:10:48. > :10:51.On this question of responsibility, you did
:10:52. > :10:54.issue some warnings about what you saw as red lights
:10:55. > :10:56.flashing, but you also said this in April of 2007.
:10:57. > :10:58.You probably know what I am going to quote.
:10:59. > :11:01.A Bank of England report said, the UK financial system
:11:02. > :11:08.And just a few months later, Northern Rock was going bust.
:11:09. > :11:11.Not long after I gave that statement, I gave a speech
:11:12. > :11:14.in which I said that the financial system has always got into trouble
:11:15. > :11:20.Why is it that we believe, we are wiser than the financiers
:11:21. > :11:23.And the complex financial products lying at the heart of the problem
:11:24. > :11:27.no one knew which bank was safe and which was not.
:11:28. > :11:29.So there were plenty of warnings, but I don't
:11:30. > :11:32.want to blame anyone here, because if any one bank had decided
:11:33. > :11:34.to get out of this business five years
:11:35. > :11:37.earlier, they would have failed to make the profits which the other
:11:38. > :11:39.banks were making, and they almost certainly would've been fired
:11:40. > :11:41.as a chief executive long before we even
:11:42. > :11:45.Equally, if any one central bank had said, look,
:11:46. > :11:49.interest rates are getting too low, let's keep them up, they would have
:11:50. > :11:51.certainly created a recession in their own economy but not
:11:52. > :11:57.An important aspect of all this is that no one had any real
:11:58. > :11:59.incentive on their own to do enough about it.
:12:00. > :12:02.I see your point, and certainly that would apply to the direct players,
:12:03. > :12:03.the bankers themselves and their businesses.
:12:04. > :12:07.That's the thing, you look at the rule-makers, the politicians
:12:08. > :12:09.and those overseeing it, like you in the
:12:10. > :12:11.central bank, and you have to ask whether they fulfilled
:12:12. > :12:12.their responsibilities then, but more
:12:13. > :12:16.interestingly, perhaps, because we don't want to spend too
:12:17. > :12:19.long in the past, whether they are today.
:12:20. > :12:22.Let me bring you to today and point you to
:12:23. > :12:28.the fact that many people look at George Osborne and they wonder
:12:29. > :13:00.whether he, to coin a phrase, is allowing some backsliding
:13:01. > :13:01.on the reforms that were promised to the
:13:02. > :13:01.important thing is to continue with the reforms and push them further.
:13:02. > :13:01.Sir John Vickers published proposals through his commission for making
:13:02. > :13:02.banks safer, ringfencing between banks that primarily serve
:13:03. > :13:02.riskier transactions with wholesale customers.
:13:03. > :13:02.That is proceeding, banks do have more capital.
:13:03. > :13:06.further in that direction over ten or 20 years.
:13:07. > :13:11.The annual bank levy has been made less onerous on banks.
:13:12. > :13:14.The Financial Conduct Authority scrapped an enquiry into the banking
:13:15. > :13:16.culture which the Chancellor promised.
:13:17. > :13:18.These are again, to use the phrase, straws in the wind.
:13:19. > :13:21.The Chancellor is easing the pressure on those bankers.
:13:22. > :13:27.What I care about is that we have simple but effective
:13:28. > :13:36.regulation, and I am deeply worried that we're making the regulatory
:13:37. > :13:39.To be honest, I don't think that any commission on culture in banks
:13:40. > :13:44.Don't you still accept that there are millions of people,
:13:45. > :13:46.not just in this country but around the world,
:13:47. > :13:52.who feel that, you know what, we paid a massive price for this
:13:53. > :13:57.meltdown that happened, but the bankers themselves didn't.
:13:58. > :14:00.The moral hazard question hasn't been resolved.
:14:01. > :14:05.The issue bankers' bonuses and addressing ridiculous
:14:06. > :14:08.levels of pay hasn't been addressed, there are too many risks
:14:09. > :14:09.being taken, and people want that addressed.
:14:10. > :14:13.I think the proposals I set out in my book will do it in a much more
:14:14. > :14:16.Rather than just trying to issue warnings
:14:17. > :14:19.to drivers and prosecute people, to force people to take out
:14:20. > :14:21.insurance upfront before they can drive, where
:14:22. > :14:23.the insurance premium they pay reflects the dangers of the car
:14:24. > :14:30.That is a much more effective way to do it.
:14:31. > :14:33.I want to make sure that banks have to take
:14:34. > :14:37.out the insurance upfront so that everyone will know that if they get
:14:38. > :14:39.into trouble, they will have positioned enough collateral
:14:40. > :14:49.so that the central bank can afford to pay
:14:50. > :14:53.out to the banks the money that they need to repay their depositors.
:14:54. > :14:55.If they do that, the banks will not be
:14:56. > :14:57.in a position to pay out extravagant bonuses,
:14:58. > :15:00.or to do many of the things that we subsequently saw and regret
:15:01. > :15:02.It is partly political, this, isn't it?
:15:03. > :15:10.Vince Cable, who was the Business Secretary
:15:11. > :15:12.in the Coalition Government, has said that this is a dangerous
:15:13. > :15:16.He was thinking about Osborne and the idea
:15:17. > :15:21.He said, it is when there is not an immediate threat to the system
:15:22. > :15:24.that the pressure goes off, bad practices creep back in,
:15:25. > :15:26.excessive risk-taking and abuse in the banking side creeps back in,
:15:27. > :15:28.and banks no longer feel under pressure
:15:29. > :15:31.Maybe that is where we are again today.
:15:32. > :15:33.We are certainly moving towards it, but I
:15:34. > :15:35.would say that the difficulty with saying, times are becoming
:15:36. > :15:38.good, bad practices are creeping in, is that
:15:39. > :15:41.in those times, people don't think the practices are bad practices,
:15:42. > :15:45.they don't think they are taking excessive risks.
:15:46. > :15:47.And that is why I want a system in which the central
:15:48. > :15:51.bank has a key role to play in ensuring that if banks take
:15:52. > :15:53.certain actions, then they have to put aside
:15:54. > :15:55.enough insurance to deal with the eventuality that
:15:56. > :16:04.And that is going to be, ultimately, the only thing that will convince
:16:05. > :16:07.people that the banking system is safe.
:16:08. > :16:09.And I understand the anger, and it's justifiable,
:16:10. > :16:12.but then, rather than just dealing with the symptoms of the anger,
:16:13. > :16:14.we need to go back to the underlying causes.
:16:15. > :16:21.This is a sort of philosophical question for someone like you,
:16:22. > :16:27.Is it, do you think, part of the duty of a central bank
:16:28. > :16:30.chief like you were to think not just about your key targets
:16:31. > :16:37.like the inflation level in the nation, but also to think
:16:38. > :16:42.about inequality and about how those on average or below
:16:43. > :16:46.average wages feel about the way the economic system works for them?
:16:47. > :16:51.So, it's certainly part of the duty of a central banker to care
:16:52. > :16:53.and think about the concerns of most people,
:16:54. > :16:57.and the way to do that is to go out and say, given the task that
:16:58. > :16:59.Parliament has given us, this is what we're doing
:17:00. > :17:05.I don't think what a central bank should do is to take upon itself
:17:06. > :17:07.to make pronouncements on areas where Parliament has not given
:17:08. > :17:12.I think that the most important thing is
:17:13. > :17:17.Certainly, when I was governor, I spent a lot of time
:17:18. > :17:21.getting out of the City of London, going round the whole
:17:22. > :17:23.of the United Kingdom, talking to people who live
:17:24. > :17:26.there, businesses, trade unions, other organisations,
:17:27. > :17:29.to explain what the Bank of England was trying to do and why it
:17:30. > :17:37.And I don't think it is to pontificate
:17:38. > :17:39.on things that are not the responsibility of the Bank of
:17:40. > :17:46.Right, let's just think about the issue of Europe
:17:47. > :17:50.I want to get to the issue of Brexit in a moment.
:17:51. > :17:53.Britons are going to vote on whether or not to leave the EU
:17:54. > :17:57.It raises the question of whether or not the European
:17:58. > :17:59.economy works, and whether the Eurozone in particular has,
:18:00. > :18:06.in a sense, put a straitjacket around the UK economy.
:18:07. > :18:11.What do you think, because you've always sounded very
:18:12. > :18:17.I think it was carried out for the very best of motives.
:18:18. > :18:19.I think, in particular, Germany consciously went out
:18:20. > :18:22.itself into Europe, to give up its sovereignty and say,
:18:23. > :18:26.we want share this with the rest of Europe so that in the future
:18:27. > :18:29.you will no longer be afraid of a large and powerful
:18:30. > :18:32.of economic performance that hasn't happened.
:18:33. > :18:37.Absolutely, and the tragedy is that the objective of Germany
:18:38. > :18:40.countries in Europe of Germany's economic and political power
:18:41. > :18:48.Do you think the Eurozone is bound to collapse?
:18:49. > :18:50.I don't, because there is so much political
:18:51. > :18:56.keep it going, and it's a battle between the political
:18:57. > :19:03.So, the economic logic is that the Eurozone in its current
:19:04. > :19:07.It would certainly be better if it hadn't started,
:19:08. > :19:10.and I think it would be better in the long run if people
:19:11. > :19:12.give serious thought to how it could gradually be dismantled,
:19:13. > :19:18.I find that a fascinating answer, because
:19:19. > :19:21.it suggests to me that you believe there is going to be long-term
:19:22. > :19:25.and unavoidable chaos inside the European Union.
:19:26. > :19:28.The Eurozone, and some member states aren't in it,
:19:29. > :19:30.but the fact is that the Eurozone is one
:19:31. > :19:32.of the central pillars of the European Union.
:19:33. > :19:34.If you think it is, in some ways, facing inevitable
:19:35. > :19:37.change, if not collapse, would it not be better for Britain
:19:38. > :19:38.to dissociate itself from this entire
:19:39. > :19:44.mess and get out of the European Union?
:19:45. > :19:46.That doesn't follow at all, because we are not members
:19:47. > :19:48.of the Eurozone and the Prime Minister has
:19:49. > :19:53.The point is, if you're not a member of the Eurozone,
:19:54. > :19:55.the European Union is going to be consumed over the next decade
:19:56. > :19:59.with the crisis in the Eurozone, so wouldn't it be better to get out?
:20:00. > :20:01.That is a different question altogether, and I think
:20:02. > :20:03.whether we stay in the European Union or whether we leave
:20:04. > :20:06.it, we're going to be affected by what happens in the Eurozone,
:20:07. > :20:11.and that's one of the concerns that I have.
:20:12. > :20:12.Wouldn't we be more seriously and damagingly
:20:13. > :20:16.affected if we were actually inside the club, because we have the option
:20:17. > :20:20.We do, but I don't think it will make an enormous difference
:20:21. > :20:23.to the impact of the problems of the Eurozone on the United Kingdom.
:20:24. > :20:31.We are a trading part of the Eurozone, it is our
:20:32. > :20:33.biggest trading partner, and that will remain true,
:20:34. > :20:42.-- we are a trading partner of the Eurozone.
:20:43. > :20:49.What I find depressing about the current debate is that
:20:50. > :20:51.everyone seems to think it is absolutely
:20:52. > :20:57.The only thing is, half of them think we
:20:58. > :20:59.should stay, and the other half think we should leave.
:21:00. > :21:02.What I find is that when I meet people, they don't ask me,
:21:03. > :21:04.do you think we should stay or leave?
:21:05. > :21:07.And they don't want to be told or advised by the former
:21:08. > :21:10.Governor of the Bank of England, or for that matter by anyone else,
:21:11. > :21:14.What they really want is to be given the arguments
:21:15. > :21:17.and the facts so they can make up their own minds.
:21:18. > :21:19.I think it's very important that people should be
:21:20. > :21:24.You do not allow people to do that if the campaign takes the form
:21:25. > :21:28.simply of slogans and it's a PR campaign.
:21:29. > :21:30.What I find interesting is that the Government,
:21:31. > :21:34.in the form of David Cameron and George
:21:35. > :21:37.Osborne, have over the last couple of weeks established a message
:21:38. > :21:41.which says, it would be a massive and grave risk to the future
:21:42. > :21:45.of the UK economy to vote to get out of the European Union.
:21:46. > :21:48.You are saying that, for you, the judgment is much more
:21:49. > :21:53.finely balanced and that, and that therefore you could not
:21:54. > :21:57.It is hard to know whether it is finely balanced without knowing
:21:58. > :22:01.What we're seeing at present is, one camp says, if we
:22:02. > :22:10.and the other camp says, no, if we leave the European Union,
:22:11. > :22:12.we'll be a land of locusts and plagues.
:22:13. > :22:13.Neither of these positions is remarkably
:22:14. > :22:24.It would be much better if we had a campaign in which people
:22:25. > :22:26.said, well, I can see merit in your argument,
:22:27. > :22:29.I don't agree with you for the following reasons,
:22:30. > :22:31.but it cannot be so blindingly obvious that we should either
:22:32. > :22:34.There have to be arguments on both sides,
:22:35. > :22:37.and I hope that the BBC would play a very important role
:22:38. > :22:40.I think the BBC sees that as it's responsibility.
:22:41. > :22:43.Mark Carney, amongst others, has talked about
:22:44. > :22:47.what he saw in January as the uncertainty, the risk
:22:48. > :22:53.premium, that would come with a vote to leave.
:22:54. > :22:56.On that specific point, if Britain voted to leave,
:22:57. > :22:58.how much uncertainty and how damaging that would be,
:22:59. > :23:03.I don't know, and I think it's hard to judge.
:23:04. > :23:04.I'm certainly not going to second-guess
:23:05. > :23:16.What I would say is that the really important thing, and I'm sure
:23:17. > :23:19.Mark himself would not want to get drawn into political issues
:23:20. > :23:23.what we need are more people who will calmly state all the facts,
:23:24. > :23:28.We have four months of this referendum campaign,
:23:29. > :23:31.and surely we should use those four months to have a proper debate
:23:32. > :23:35.We can't face four months of an advertising campaign on both
:23:36. > :23:40.I suppose the final question would be, given everything we've
:23:41. > :23:43.talked about, from the global financial crash to the Brexit,
:23:44. > :23:47.why anyone would take the advice, frankly, of economists any more?
:23:48. > :23:50.You have said that we have to acknowledge that economists often
:23:51. > :23:52.And the future is inherently unknowable.
:23:53. > :23:56.I don't think people should vote one way or another because of the advice
:23:57. > :23:58.of economists or industrialists or bankers, or anybody who stands up
:23:59. > :24:02.and says, I've signed a petition, you better listen to this
:24:03. > :24:07.Lord King, for now, thanks for being on Hardtalk.
:24:08. > :24:45.Hello. There is hope on the horizon for a reasonable weekend to come. It
:24:46. > :24:47.is a long way off, and we have to get through the