Mervyn King, Lord King HARDtalk


Mervyn King, Lord King

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Sharapova after she failed a drug stressed. -- a drugs test.

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How sound are the foundations of the world economy?

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Eight years after the financial meltdown which rocked global

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capitalism, the answer seems to be they are disturbingly fragile.

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At least, that is the view of my guest today, renowned

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economist and former Governor of the Bank of England,

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He was a key player in efforts to save

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the banking system from terminal collapse in those dark days of 2008.

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Now, he says another great crisis is looming unless,

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I think the chat we will have is very much in the context

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of you being a key player in the financial meltdown

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of 2007-2008 and the few years after.

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In that regard, would you say that today you feel

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our political and economic leaders have a great deal more wisdom

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Well, I'm not sure of any of us have a

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It is very striking that eight years after

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the banking crisis really was ended as a banking crisis,

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The continued reliance on central banks to try to stimulate growth,

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it's certainly worth having, but it isn't generating

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Not a sustainable recovery, and maybe not

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

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fundamentally stronger, than it was back then.

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

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The banking system in Britain and the

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United States is certainly safer, but not as safe as I would like it

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The banking system elsewhere in the world is certainly not

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When you said recently, without reform of the financial

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system, fundamental reform, another crisis is certain,

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you're talking about the global system.

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You see the fundamental weaknesses as being not

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in New York and London but somewhere else?

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The banking system in general is still prone to the sort

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It's less likely to come in New York or London

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than it did then, but it could happen anywhere else

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Wherever it happens, it will impact on us.

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I guess what people want to take from this is, you are saying,

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The banking system is still exposed to the possibility of people

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taking their money away from the banks and the banks

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The result is the risk of a further crash in the banking system,

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and it's not likely now, because the banks are not as exposed

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as they were, but they are still exposed to the possibility

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There are straws in the wind that suggest that this

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impending crisis might not be that far away.

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The Bank for International Settlement in Switzerland,

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their chief, just in last 24 hours, has pointed to some things

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concerned about - the prevalence of negative interest rates,

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for example, in Japan and parts of the

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Eurozone, he's suggesting, his words, not mine,

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this may not be a bolt from the blue, but there are signs

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

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I don't necessarily agree with the descriptions that the bank

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for International Settlement has given.

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I do think that someone coming from Mars to look at our world

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economy would say, hang on, we have had the biggest monetary

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stimulus the world has ever seen, and yet, eight years

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Surely, the answer can't be more monetary

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You say the fundamental problem isn't liquidity, it's insolvency.

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I wonder what you really mean by that in terms that people

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I think there isn't a problem today is insolvency in the British

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Banks in Europe, in China and other emerging markets,

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have taken loans that will not be repaid to the extent

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That means they are vulnerable to losing

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But the bigger problem in the world economy is that we got stuck

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in a position where we think that very

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low interest rates are the answer, and in the short run,

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You give the painkiller to relieve the pain,

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but it doesn't deal with the underlying symptoms.

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We got ourselves into a position where

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there was a major disequilibrium, as I call it, in the world economy,

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which will require changes in the countries

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We need to get back to a world with higher interest rates

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where there is an incentive to saving economies,

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there is a mechanism for choosing between good

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You say we need to get there, but it is one

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thing saying it, it is another having a prescription as to how.

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It isn't cutting interest rates, when

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you need in the long run to get back to higher rates.

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What about pumping new money into economies,

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the quantitive easing we have seen in the United States and Europe,

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In the short run, it was necessary to prevent a collapse

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of our economies and a repeat of the Great

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But we were going in the opposite direction to where we needed to go

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Sometimes, you need to do that to create the painkiller,

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but in the long run, we need to encourage some

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economies, like ours and that in the United States,

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to save more, invest more and export more,

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and economies in Germany and China to do the opposite.

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Making that adjustment is difficult to do, but we've made very

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In a sense, that's quite an important but

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conventional economic analysis you've just given me,

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but that tome in front of you, which is the book you've written

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after a lot of thought about the way capitalism works,

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goes a great deal further than just sort

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of the specifics of economic management.

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You say, hang on a minute, some of the fundamental

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assumptions we make about money and about banks are wrong,

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and you quote a Chinese central banker who said,

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I think after the crash, the problem with you in the West is,

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you don't really understand money and banks.

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And you seem to have some sympathy with his view.

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I do, because I asked him what he thought of the Industrial Revolution

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250 years on, and he said me, we in China have learnt a lot

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They can see the benefits of a market economy,

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competition, in generating new products, raising

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living standards, fostering economic growth, and we're trying to emulate

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Then he paused and said, I'm not sure you've got the hang

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And he's right, because only a few years ago,

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we had a massive bank run in the leading banks in New York,

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and it would've happened in London, too,

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We don't make banks take out sufficient insurance before

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they start operating to make it easier for the central bank

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to provide liquidity when they are in a

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To keep this simple and straightforward,

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you seem to be saying that your radical shake-up

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of banking would require a much more conservative,

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maybe old-fashioned, approach the banking,

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where the banks would have to put up much more

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collateral before they were allowed to exercise their right to lend

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and take risks with other people's money.

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Yes, so it is like taking insurance, but it is not telling

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every bank it has to be conservative.

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If you want to drive a faster and more dangerous car,

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If banks want to make riskier lending, then they would have to pay

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You're saying, if I may, the price on risk that banks

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live with today is nowhere near as high as it should be.

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We know that before the crisis the banks paid no

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penalty or price for access to liquidity and money

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from the central banks when the crisis came.

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What we now need to do, and I don't think it is difficult

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now, we have gone some way towards it as a result

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liquid assets by putting deposits with central banks than they ever

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makes them safer, so we have gone some way towards it,

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You are saying this now, obviously a few years

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after you were in the eye of the storm in 2007 and 2008.

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We had Ben Bernanke on the show recently and when I pushed him

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on areas where he could now tell me he was regretful,

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that he got wrong, he was not keen to go into that territory.

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I wonder about you and this idea of mea culpa.

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I think a lot of people would like to hear that from those

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They would like to hear someone say, you know what, I got it wrong

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But actually, no one had an incentive to

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On this question of responsibility, you did

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issue some warnings about what you saw as red lights

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flashing, but you also said this in April of 2007.

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You probably know what I am going to quote.

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A Bank of England report said, the UK financial system

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And just a few months later, Northern Rock was going bust.

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Not long after I gave that statement, I gave a speech

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in which I said that the financial system has always got into trouble

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Why is it that we believe, we are wiser than the financiers

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And the complex financial products lying at the heart of the problem

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no one knew which bank was safe and which was not.

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So there were plenty of warnings, but I don't

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want to blame anyone here, because if any one bank had decided

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to get out of this business five years

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earlier, they would have failed to make the profits which the other

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banks were making, and they almost certainly would've been fired

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as a chief executive long before we even

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Equally, if any one central bank had said, look,

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interest rates are getting too low, let's keep them up, they would have

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certainly created a recession in their own economy but not

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An important aspect of all this is that no one had any real

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incentive on their own to do enough about it.

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I see your point, and certainly that would apply to the direct players,

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the bankers themselves and their businesses.

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That's the thing, you look at the rule-makers, the politicians

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and those overseeing it, like you in the

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central bank, and you have to ask whether they fulfilled

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their responsibilities then, but more

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

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long in the past, whether they are today.

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Let me bring you to today and point you to

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the fact that many people look at George Osborne and they wonder

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

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on the reforms that were promised to the

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important thing is to continue with the reforms and push them further.

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Sir John Vickers published proposals through his commission for making

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banks safer, ringfencing between banks that primarily serve

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riskier transactions with wholesale customers.

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That is proceeding, banks do have more capital.

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further in that direction over ten or 20 years.

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The annual bank levy has been made less onerous on banks.

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The Financial Conduct Authority scrapped an enquiry into the banking

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culture which the Chancellor promised.

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These are again, to use the phrase, straws in the wind.

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The Chancellor is easing the pressure on those bankers.

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What I care about is that we have simple but effective

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regulation, and I am deeply worried that we're making the regulatory

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To be honest, I don't think that any commission on culture in banks

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Don't you still accept that there are millions of people,

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not just in this country but around the world,

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who feel that, you know what, we paid a massive price for this

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meltdown that happened, but the bankers themselves didn't.

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The moral hazard question hasn't been resolved.

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The issue bankers' bonuses and addressing ridiculous

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levels of pay hasn't been addressed, there are too many risks

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being taken, and people want that addressed.

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I think the proposals I set out in my book will do it in a much more

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Rather than just trying to issue warnings

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to drivers and prosecute people, to force people to take out

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insurance upfront before they can drive, where

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the insurance premium they pay reflects the dangers of the car

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That is a much more effective way to do it.

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I want to make sure that banks have to take

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out the insurance upfront so that everyone will know that if they get

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into trouble, they will have positioned enough collateral

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so that the central bank can afford to pay

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out to the banks the money that they need to repay their depositors.

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If they do that, the banks will not be

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in a position to pay out extravagant bonuses,

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or to do many of the things that we subsequently saw and regret

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It is partly political, this, isn't it?

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Vince Cable, who was the Business Secretary

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in the Coalition Government, has said that this is a dangerous

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He was thinking about Osborne and the idea

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He said, it is when there is not an immediate threat to the system

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that the pressure goes off, bad practices creep back in,

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excessive risk-taking and abuse in the banking side creeps back in,

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and banks no longer feel under pressure

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Maybe that is where we are again today.

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We are certainly moving towards it, but I

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would say that the difficulty with saying, times are becoming

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good, bad practices are creeping in, is that

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in those times, people don't think the practices are bad practices,

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they don't think they are taking excessive risks.

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And that is why I want a system in which the central

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bank has a key role to play in ensuring that if banks take

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certain actions, then they have to put aside

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enough insurance to deal with the eventuality that

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And that is going to be, ultimately, the only thing that will convince

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people that the banking system is safe.

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And I understand the anger, and it's justifiable,

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but then, rather than just dealing with the symptoms of the anger,

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we need to go back to the underlying causes.

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This is a sort of philosophical question for someone like you,

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Is it, do you think, part of the duty of a central bank

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chief like you were to think not just about your key targets

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like the inflation level in the nation, but also to think

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about inequality and about how those on average or below

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

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So, it's certainly part of the duty of a central banker to care

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and think about the concerns of most people,

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and the way to do that is to go out and say, given the task that

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Parliament has given us, this is what we're doing

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I don't think what a central bank should do is to take upon itself

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to make pronouncements on areas where Parliament has not given

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I think that the most important thing is

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Certainly, when I was governor, I spent a lot of time

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getting out of the City of London, going round the whole

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of the United Kingdom, talking to people who live

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there, businesses, trade unions, other organisations,

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to explain what the Bank of England was trying to do and why it

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And I don't think it is to pontificate

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on things that are not the responsibility of the Bank of

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Right, let's just think about the issue of Europe

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

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Britons are going to vote on whether or not to leave the EU

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It raises the question of whether or not the European

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economy works, and whether the Eurozone in particular has,

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in a sense, put a straitjacket around the UK economy.

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What do you think, because you've always sounded very

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I think it was carried out for the very best of motives.

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I think, in particular, Germany consciously went out

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itself into Europe, to give up its sovereignty and say,

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we want share this with the rest of Europe so that in the future

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you will no longer be afraid of a large and powerful

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of economic performance that hasn't happened.

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Absolutely, and the tragedy is that the objective of Germany

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countries in Europe of Germany's economic and political power

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Do you think the Eurozone is bound to collapse?

:18:41.:18:48.

I don't, because there is so much political

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keep it going, and it's a battle between the political

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So, the economic logic is that the Eurozone in its current

:18:57.:19:03.

It would certainly be better if it hadn't started,

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and I think it would be better in the long run if people

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give serious thought to how it could gradually be dismantled,

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I find that a fascinating answer, because

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it suggests to me that you believe there is going to be long-term

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and unavoidable chaos inside the European Union.

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The Eurozone, and some member states aren't in it,

:19:26.:19:28.

but the fact is that the Eurozone is one

:19:29.:19:30.

of the central pillars of the European Union.

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If you think it is, in some ways, facing inevitable

:19:33.:19:34.

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

:19:35.:19:37.

to dissociate itself from this entire

:19:38.:19:38.

mess and get out of the European Union?

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That doesn't follow at all, because we are not members

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of the Eurozone and the Prime Minister has

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The point is, if you're not a member of the Eurozone,

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the European Union is going to be consumed over the next decade

:19:54.:19:55.

with the crisis in the Eurozone, so wouldn't it be better to get out?

:19:56.:19:59.

That is a different question altogether, and I think

:20:00.:20:01.

whether we stay in the European Union or whether we leave

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it, we're going to be affected by what happens in the Eurozone,

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and that's one of the concerns that I have.

:20:07.:20:11.

Wouldn't we be more seriously and damagingly

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affected if we were actually inside the club, because we have the option

:20:13.:20:16.

We do, but I don't think it will make an enormous difference

:20:17.:20:20.

to the impact of the problems of the Eurozone on the United Kingdom.

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We are a trading part of the Eurozone, it is our

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biggest trading partner, and that will remain true,

:20:32.:20:33.

-- we are a trading partner of the Eurozone.

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What I find depressing about the current debate is that

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everyone seems to think it is absolutely

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The only thing is, half of them think we

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should stay, and the other half think we should leave.

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What I find is that when I meet people, they don't ask me,

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do you think we should stay or leave?

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And they don't want to be told or advised by the former

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Governor of the Bank of England, or for that matter by anyone else,

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What they really want is to be given the arguments

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and the facts so they can make up their own minds.

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I think it's very important that people should be

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You do not allow people to do that if the campaign takes the form

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simply of slogans and it's a PR campaign.

:21:25.:21:28.

What I find interesting is that the Government,

:21:29.:21:30.

in the form of David Cameron and George

:21:31.:21:34.

Osborne, have over the last couple of weeks established a message

:21:35.:21:37.

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

:21:38.:21:41.

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

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You are saying that, for you, the judgment is much more

:21:46.:21:48.

finely balanced and that, and that therefore you could not

:21:49.:21:53.

It is hard to know whether it is finely balanced without knowing

:21:54.:21:57.

What we're seeing at present is, one camp says, if we

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and the other camp says, no, if we leave the European Union,

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we'll be a land of locusts and plagues.

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Neither of these positions is remarkably

:22:13.:22:13.

It would be much better if we had a campaign in which people

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said, well, I can see merit in your argument,

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I don't agree with you for the following reasons,

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but it cannot be so blindingly obvious that we should either

:22:30.:22:31.

There have to be arguments on both sides,

:22:32.:22:34.

and I hope that the BBC would play a very important role

:22:35.:22:37.

I think the BBC sees that as it's responsibility.

:22:38.:22:40.

Mark Carney, amongst others, has talked about

:22:41.:22:43.

what he saw in January as the uncertainty, the risk

:22:44.:22:47.

premium, that would come with a vote to leave.

:22:48.:22:53.

On that specific point, if Britain voted to leave,

:22:54.:22:56.

how much uncertainty and how damaging that would be,

:22:57.:22:58.

I don't know, and I think it's hard to judge.

:22:59.:23:03.

I'm certainly not going to second-guess

:23:04.:23:04.

What I would say is that the really important thing, and I'm sure

:23:05.:23:16.

Mark himself would not want to get drawn into political issues

:23:17.:23:19.

what we need are more people who will calmly state all the facts,

:23:20.:23:23.

We have four months of this referendum campaign,

:23:24.:23:28.

and surely we should use those four months to have a proper debate

:23:29.:23:31.

We can't face four months of an advertising campaign on both

:23:32.:23:35.

I suppose the final question would be, given everything we've

:23:36.:23:40.

talked about, from the global financial crash to the Brexit,

:23:41.:23:43.

why anyone would take the advice, frankly, of economists any more?

:23:44.:23:47.

You have said that we have to acknowledge that economists often

:23:48.:23:50.

And the future is inherently unknowable.

:23:51.:23:52.

I don't think people should vote one way or another because of the advice

:23:53.:23:56.

of economists or industrialists or bankers, or anybody who stands up

:23:57.:23:58.

and says, I've signed a petition, you better listen to this

:23:59.:24:02.

Lord King, for now, thanks for being on Hardtalk.

:24:03.:24:07.

Hello. There is hope on the horizon for a reasonable weekend to come. It

:24:08.:24:45.

is a long way off, and we have to get through the

:24:46.:24:47.

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