Mervyn King, Lord King HARDtalk

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

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.

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

economist and former Governor of the Bank of England,

He was a key player in efforts to save

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

Now, he says another great crisis is looming unless,

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

of you being a key player in the financial meltdown

of 2007-2008 and the few years after.

In that regard, would you say that today you feel

our political and economic leaders have a great deal more wisdom

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

It is very striking that eight years after

the banking crisis really was ended as a banking crisis,

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

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

Not a sustainable recovery, and maybe not

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

fundamentally stronger, than it was back then.

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

The banking system in Britain and the

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

The banking system elsewhere in the world is certainly not

When you said recently, without reform of the financial

system, fundamental reform, another crisis is certain,

you're talking about the global system.

You see the fundamental weaknesses as being not

in New York and London but somewhere else?

The banking system in general is still prone to the sort

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

than it did then, but it could happen anywhere else

Wherever it happens, it will impact on us.

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

The banking system is still exposed to the possibility of people

taking their money away from the banks and the banks

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

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

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

There are straws in the wind that suggest that this

impending crisis might not be that far away.

The Bank for International Settlement in Switzerland,

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

concerned about - the prevalence of negative interest rates,

for example, in Japan and parts of the

Eurozone, he's 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.

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

for International Settlement has given.

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

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

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

Surely, the answer can't be more monetary

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

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

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

Banks in Europe, in China and other emerging markets,

have taken loans that will not be repaid to the extent

That means they are vulnerable to losing

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

in a position where we think that very

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

You give the painkiller to relieve the pain,

but it doesn't deal with the underlying symptoms.

We got ourselves into a position where

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

which will require changes in the countries

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

where there is an incentive to saving economies,

there is a mechanism for choosing between good

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

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

It isn't cutting interest rates, when

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

What about pumping new money into economies,

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

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

of our economies and a repeat of the Great

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

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

but in the long run, we need to encourage some

economies, like ours and that in the United States,

to save more, invest more and export more,

and economies in Germany and China to do the opposite.

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

In a sense, that's quite an important but

conventional economic analysis you've just given me,

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

after a lot of thought about the way capitalism works,

goes a great deal further than just sort

of the specifics of economic management.

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

assumptions we make about money and about banks are wrong,

and you quote a Chinese central banker who said,

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

you don't really understand money and banks.

And you seem to have some sympathy with his view.

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

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

They can see the benefits of a market economy,

competition, in generating new products, raising

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

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

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

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

and it would've happened in London, too,

We don't make banks take out sufficient insurance before

they start operating to make it easier for the central bank

to provide liquidity when they are in a

To keep this simple and straightforward,

you seem to be saying that your radical shake-up

of banking would require a much more conservative,

maybe old-fashioned, approach the 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 insurance, but it is not telling

every bank it has to be conservative.

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

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

You're 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 the banks paid no

penalty or price for access to liquidity and money

from the central banks when the crisis came.

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

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

liquid assets by putting deposits with central banks than they ever

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

You are saying this now, obviously a few years

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

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

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

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

I wonder about you and this idea of mea culpa.

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

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

But actually, no one had an incentive to

On this question of responsibility, you did

issue some warnings about what you saw as red lights

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

You probably know what I am going to quote.

A Bank of England report said, the UK financial system

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

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

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

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

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

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

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

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

to get out of this business five years

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

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

as a chief executive long before we even

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

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

certainly created a recession in their own economy but not

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

incentive on their own to do enough about it.

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

the bankers themselves and their businesses.

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

and those overseeing it, like you in the

central bank, and you have to ask whether they fulfilled

their responsibilities then, but more

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

long in the past, whether they are today.

Let me bring you to today and point you to

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

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

on the reforms that were promised to the

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

Sir John Vickers published proposals through his commission for making

banks safer, ringfencing between banks that primarily serve

riskier transactions with wholesale customers.

That is proceeding, banks do have more capital.

further in that direction over ten or 20 years.

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

The Financial Conduct Authority scrapped an enquiry into the banking

culture which the Chancellor promised.

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

The Chancellor is easing the pressure on those bankers.

What I care about is that we have simple but effective

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

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

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 happened, but the bankers themselves didn't.

The moral hazard question hasn't been resolved.

The issue bankers' bonuses and addressing ridiculous

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

being taken, and people want that addressed.

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

Rather than just trying to issue warnings

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

insurance upfront before they can drive, where

the insurance premium they pay reflects the dangers of the car

That is a much more effective way to do it.

I want to make sure that banks have to take

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

into trouble, they will have positioned enough collateral

so that the central bank can afford to pay

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

If they do that, the banks will not be

in a position to pay out extravagant bonuses,

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

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

Vince Cable, who was the Business Secretary

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

He was thinking about Osborne and the idea

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

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

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

and banks no longer feel under pressure

Maybe that is where we are again today.

We are certainly moving towards it, but I

would say that the difficulty with saying, times are becoming

good, bad practices are creeping in, is that

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

they don't think they are taking excessive risks.

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

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

certain actions, then they have to put aside

enough insurance to deal with the eventuality that

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

people that the banking system is safe.

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

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

we need to go back to the underlying causes.

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

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

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

like the inflation level 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?

So, it's 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 say, given the task that

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

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

to make pronouncements on areas where Parliament has not given

I think that the most important thing is

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

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

of the United Kingdom, talking to people who live

there, businesses, trade unions, other organisations,

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

And I don't think it is to pontificate

on things that are not the responsibility of the Bank of

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

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

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

It raises the question of whether or not the European

economy works, and whether the Eurozone in particular has,

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

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

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

I think, in particular, Germany consciously went out

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

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

you will no longer be afraid of a large and powerful

of economic performance that hasn't happened.

Absolutely, and the tragedy is that the objective of Germany

countries in Europe of Germany's economic and political power

Do you think the Eurozone is bound to collapse?

I don't, because there is so much political

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

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

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

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

give serious thought to how it could gradually be dismantled,

I find that a fascinating answer, because

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

and unavoidable chaos inside the European Union.

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

but the fact is that the Eurozone is one

of the central pillars 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 dissociate itself from this entire

mess and get out of the European Union?

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

of the Eurozone and the Prime Minister has

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

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

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

That is a different question altogether, and I think

whether we stay in the European Union or whether we leave

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

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

Wouldn't we be more seriously and damagingly

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

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

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

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

biggest trading partner, and that will remain true,

-- we are a trading partner of the Eurozone.

What I find depressing about the current debate is that

everyone seems to think it is absolutely

The only thing is, half of them think we

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

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

do you think we should stay or leave?

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

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

What they really want is to be given the arguments

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

I think it's very important that people should be

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

simply of slogans and it's a PR campaign.

What I find interesting is 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 that, for you, the judgment is much more

finely balanced and that, and that therefore you could not

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

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

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

we'll be a land of locusts and plagues.

Neither of these positions is remarkably

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

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

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

but it cannot be so blindingly obvious that we should either

There have to be arguments on both sides,

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

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

Mark Carney, amongst others, has talked about

what he saw in January as the uncertainty, the risk

premium, that would come with a vote to leave.

On that specific point, if Britain voted to leave,

how much uncertainty and how damaging that would be,

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

I'm certainly not going to second-guess

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

Mark himself would not want to get drawn into political issues

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

We have four months of this referendum campaign,

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

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

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

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

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

You have said that we have to acknowledge that economists often

And the 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've signed a petition, you better listen to this

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

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

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