Transcripts For BLOOMBERG Leaders With Lacqua 20180101

Lacqua, former bank of england governor, economist and author mervyn king. Lord king, thank you so much for speaking to bloomberg tv. It is always a great pleasure. What lessons have we learned from the financial crisis . Lord king i hope we learned the lesson that this was a lot bigger than just a financial crisis. That it represented a serious problem in the world economy. Not sure that everyone sees it that way, but i think that is the most important lesson. I think secondly we learned we that we need to worry not just about the amount of Equity Capital that banks issue, we we need to limit the leverage, but we also need to tackle the problem that banks are inherently unstable. And if people lose confidence in them, they take their money out, or they do not roll over their lending, and we need a mechanism for dealing with that. Francine did we see early signs of it, or were we late to the game . Lord king i think we saw in the world economy, and we certainly signs should have given more weight to the rise of leverage, the borrowing of the Banking System. Of course at that point, the banks themselves were deeply reluctant to admit that what was going on was not sustainable. Francine at what point in the financial crisis or the leadup to the financial crisis did you think there was something seriously wrong here . Lord king i gave a speech before the crisis erupted in 2007 at the Mansion House in london. Ignore the unsolicited emails that rain down on us offering unwanted credit. I received one last week that began, we have the solution, mervyn, for your bankruptcy. [laughter] lord king excessive leverage is the common theme of many earlier financial crises. Are we really so much cleverer than the financiers of the past . And that was not a welcome statement. People thought we are wiser than people in the past. Well, it turned out we werent. Now, i dont think it is ever easy to say that a particular level of leverage was going to generate a crisis. And no one there is an element of randomness in the small events that triggered the crisis, but it was pretty clear, i think, that the system as a whole was in some serious trouble. Francine so with hindsight, would you have done something anything differently to placate this nonconfidence . Lord king well, i think the things we had to do were wellknown in the u. K. And had head been identified before. One was we did not have a resolution framework to deal with the failing of a bank in the u. K. Every other g7 country had one. We did not have 100 deposit insurance. And that was bound to mean that once a bank run were to start, that it would be rational for other depositors to join it. And these things were well understood and well known. I dont think that made the judgment of whether we were about to go into a banking crisis any easier. What we knew was the system was not as resilient as it should have been. Rishaad hello, i am Rishaad Salamat bringing you a special report on northern iraq, the subprime fallout that is spreading across the atlantic to the united kingdom. Panic in the straits, and who knows whether your money is going to be safe . I do want to transfer my money. Francine the cues that formed outside Northern Rock represented the first bank run in britain in 150 years. Depositors were demanding their money back after it was revealed the lender had tapped the bank of england for emergency funding. The run did not stop until the government gave a taxpayer backed guarantee that all existing deposits were safe. Would you have done things differently for Northern Rock . Lord king we did support the bank. We were the lender of last resort, right up and to to the the point where they ran out of money and could not give us any collateral to lend against. So the thing that is odd about that is that people somehow seem to think we did not lend to Northern Rock. We lent a vast amount to Northern Rock. And the very first conversation i had with the chairman of Northern Rock in august 2007 was in which i said, if it comes to it, we would be there as a lender of last resort. The problem was that Northern Rock, which was not doing anything that other banks not themselves doing, had a Business Model which ended when the market in mortgagebacked securities closed, and they had a very high leverage at that point, even though they met all the International Capital standards. So it was not as if Northern Rock was somehow taking big risks with the definition of capital that the International Basel standards said they should hold. It is just that the structure of the bank, which was basically borrowing short and Lending Mortgage lending, meant they that they were not required to hold very much Equity Capital. And that is what made them very vulnerable. And it was, you could draw a timeline, and you knew when the bank would run out of money. And it did at exactly that point. I remember when the government appointed Goldman Sachs to help them find a way of selling Northern Rock. So actually when i met Goldman Sachs for the first time, we both agreed within a few minutes that the only end result was nationalization. But it could, if we had had a resolution framework, Northern Rock would have been dealt with over one weekend, and it would never have been the news story it became. So after the fall of lehman brothers, it was pretty obvious that there needed to be a coordinated signal that we would do whatever was necessary to keep the economy functioning and to keep the Financial System going. I think the move in october 2008 originated in a telephone conversation between ben bernanke and myself. And i said to him i thought it would be a good idea, since we were probably all considering cuts in Interest Rates, we should coordinate it. We agreed that he would speak to jeanclaude trichet, and i would speak to some others, and it became a g10 movement. It took about a week or so to put together. We changed the time of our normal meeting so we could announce at the exact same time, this coordinated Interest Rate movement. And indeed i remember we informed our politicians just before we did it. I think the house will want to know that the governor for the bank of england has Just Announced an immediate 0. 5 cut in Interest Rates is done so in a coordinated action around the world in which the u. S. Fed has cut Interest Rates by 0. 5 , the ecb by. 5 , the swiss and other members of the g10 have all cut Interest Rates, showing global problems are best dealt with by global action. Francine so who knew about this, the 10 central bankers . Lord king yes, and among other people inside the central banking world. We did not brief the political world because that, im afraid in modern circumstance, means inevitably a leak. And that was the one thing that would have undermined the operation. Francine is that what makes the big difference between the Central Banks and the politicians . Lord king yes. I will not go into detail, but if i had to say the big difference between the Central Banks and politicians in the crisis, i could talk to another central banker confident that it would be a conversation in confidence, and it would be treated with discretion. I think that whatever discussions took place with politicians, they seemed to end up in the, in the media. Francine how did you cope with the financial crisis . What are the attributes that a central banker needs for working under pressure, extreme pressure . Francine long before mervyn king set foot on threadneedle street, he was an academic teaching in prestigious institutions like the university of cambridge, harvard, and m. I. T. , where his office happen to adjoin to then assistant professor ben bernanke. In 1991, he brought his quick thinking to the bank of england as its chief economist, moving up the ranks to Deputy Governor then to the top job. It was a long way from his Humble Beginnings in the english midlands. What did you want to be as a child . Lord king i wanted to play cricket for my county, worcestershire. I would play for them the whole season apart from the last week of june and the first week of july when i would take two weeks off to defend my singles title at wimbledon. Francine that did not work out. Lord king it did not work out. Francine are there parallels between sportsmanship and policymaking . Lord king very much so. I think one reason i started a charity to encourage Young Children to play cricket and competitive sports is that it is a very good way to learn in a harmless environment that it is important to compete, but to have the ability once the game ends to be friends with people afterwards. I think in Business Life it is very important for people to realize they are competing. It is not just a happy game. You are competing against each other, but you can still have good personal relationships outside. You learn how to win and how to lose, something which some politicians have, but not all. And these are lessons for life, which are very, very important. Francine how did you get this love of sports . Did it come through your father . Lord king yes. I was growing up. My father was a schoolteacher. We moved around a lot. I remember we lived in yorkshire for a while. We were living in a Council House where it was next to the cricket ground. And i went to sleep as a small boy listening to the sound of the ball on the bat outside my window. Francine does your family, did it have a big influence on you growing up . Lord king yes, and i think my father particularly. Because he could have gone to university had his parents been able to afford to send him, and he couldnt. And i come from the lucky generation, people born in 1948. Because we did not have to fight in the war. My parents did. I went to an education that i had free of charge. I was sent to the United States on a scholarship. I paid nothing for that. Everything was worked in my favor, and young people today are facing a more challenging environment. They have to pay for their college education. Now, there are good reasons for that, because many more people go to college, and it is not obvious why the people who dont go to college, who by and large earn less, should pay for the people who do go to college who thereby earn more later in life. But nevertheless, it is tougher for the younger generation. And i think it is beholden on the older generation to recognize that we will have to make some sacrifices to help the younger generation. Francine what has made you the central bank that you became . Is it, was it academics, was it studying . Lord king i think it is a mixture of things. I think there is no doubt that my academic background was fundamentally important in being concerned all the time about what is the fundamental reason why this is happening . And have we seen this in the past . I was much less concerned with the sort of moment to moment movements in Financial Markets because it was not clear that actually meant a great deal. It was a symptom of some deeper problem that i was trying to get to the bottom of. That was fundamentally important. I think the other thing was a number of people i have known well in academic life like ben bernanke, janet yellen, stan fischer, larry summers, they were all in policy positions. And so there was a natural ease of having a conversation about these questions. You know, tim geithner, who did not have an academic background, but he had been in the treasury a long time. That was very important, i think, in tim being able to interact with people around the world because he knew them all. I think if he had arrived in office only six months previously, it would have been very, very difficult. And he had experience in the Federal Reserve bank of new york and then in the u. S. Treasury, so i think the continuity there, knowing people, having had a long time in your career where you have had a chance to think through what you really believe about why Banking Systems are fragile, what causes disruptions, what is the right way to respond to it, these things were very important. And i think one of the problems that the political side had was that deep down they did not really understand these issues. And they thought my god, it is a crisis. We have got to find a way of dealing with it, but they were not able to easily conceptualize the nature of the problems and therefore to come up with the right solutions. Francine how do you cope with the financial crisis . What are the attributes that a central banker needs for working under pressure, extreme pressure . Lord king well, one is i think you generally need to know what is the right thing to do. I think that both ben bernanke and i benefited from a study of financial history, which meant that the problems that were coming up were not unheard of. We knew that these problems had occurred in the past, and we knew what we had to do about it. So i dont think in that sense that we were reacting by saying, my goodness me, what is going on . Francine there are critics who say Central Banks played a key part in inequality, right, by putting money out there. Lord king so i think that is a misleading way of putting it. There is no doubt that in terms of wealth, by allowing Interest Rates go to zero and by buying assets, that undoubtedly the apparent inequality of Wealth Distribution has increased. But that is only a temporary phenomenon that will last as long as Interest Rates stay very low. Now, it has an intergenerational effect. It has undoubtedly made life much more difficult for young people than for old people, because people who are buying houses for the first time now are likely to find themselves buying at the top of a market, and later in life, when it comes to sell them, they will be selling at maybe much lower house price levels relative to their incomes, so there is an intergenerational aspect, but i think that broad apparent increase in wealth inequality will reverse itself as Interest Rates get back to a more normal level, if we can find a way of getting back there. I think when it comes to labor incomes, i dont think Central Banks have any responsibility for what has been going on. Because this is partly a function of technology. It is partly a function of trade and globalization, and we should not shy away from admitting that fact, and it is the failure of politicians to confront it and to say, yes, we think there are benefits to the country as a whole from having these cheap imports from china, but we must as a society do something for those who are losing out in this competition. And that is what we have been reluctant to do. Francine how do you explain brexit . Lord king so it looked as if there was a Propaganda Campaign going on. For the governor of the bank of england, sir mervyn king. Francine in 2013, mervyn king stepped down as governor of the bank of england after a decade at the helm. He helped steer the economy out of a financial storm, but he did not stop sounding warnings that the world faced a new crisis unless there was reform in the financial sector. Where do you think the next crisis lies . Lord king i would guess, if i had to, it would be in the area of high amounts of debt, because the amount of debt in the world today is larger than it was years ago. And i think the risk is that there will be some defaults around the world, which will not look coordinated or related, but actually they will have knockon effects and lead other people to default. And i think once that happens, you may find that the Banking System once again looks maybe overleveraged or undercapitalized because the losses that they will take as a result of these defaults will eat up some of the Equity Capital that they have on their Balance Sheet at present. And i think that is where we may see we can see examples in china. There have been some defaults. There are within the Monetary Union in europe, greece has effectively defaulted from part of its debt. In terms of the present value of its liabilities. And indeed, the Banking System does not look very resilient in the Monetary Union. Francine what will the u. K. Look like in 10 years . Lord king i do not know again, because i think there are big challenges facing the u. K. I dont think, myself, that brexit is the biggest economic challenge. I think the biggest economic challenge is that, as a nation, we are saving less as a fraction of our National Income than any other country in the g20. We are not saving enough to finance our pensions. We are not saving enough to finance care for the elderly. We dont seem to know how to finance the National Health service. We still have a large budget deficit. And we have a large external current account deficit. The biggest risk to the u. K. On the political side is of muddled thinking. Francine on brexit . Or on everything . Lord king on all these issues. Both in terms of thinking that there is an easy way to improve peoples living standards, when there is not, and in terms of thinking now that, well, we can all have a softer, cuddlier brexit. And i think this just completely fails to cope with the realities of it. I think there are two positions you could take on brexit, both of which are logically coherent, but neither of which seems to me to represent what most politicians are now saying. One is to say that we really do want to stay in the Single Market and the customs union, in which case we that is effectively being in the european union, and we should confront that fact and maybe have a i think politically, the only way to deal with that is have a second referendum and argue that we should reverse course. Francine do you think we will have a second referendum . Lord king that is a political judgment. I have no means to think it. I think it is unlikely, but it is at least a coherent position to say that if we want to stay in the Single Market and customs union, then we should stay in the european union. The other coherent position is to say no, we have said we will leave. That means, as everyone made clear in the referendum campaign, that we would leave the Single Market and the customs union, that we are ready to do that. But having made that position clear, the u. K. Would then be announce itsf all, new u. K. Immigration policy and say to our partners in europe that we would like to negotiate a Free Trade Agreement at least in manufactured goods. That is a coherent position. What is not coherent is suddenly to turn around and say we are leaving, which was what was the position in the manifestoes of both major parties, who afterward increased their votes, but yet to say at the same time we really want to stay in the Single Market and customs union. That is not a coherent position. Francine how do you explain brexit . Why did people vote for brexit . Lord king i think there were, there were two main reasons. One is that it was Crystal Clear that the only way the u. K. Could control immigration was to leave the european union. The government had promised that it would control it. It had not done so. It did not seem to show much remorse for that fact. And most voters did want some control on immigration, and being in the e. U. Meant that was impossible. And it was interesting that the government simply avoided the issue of immigration. It did not argue for migration, and immigration, it simply ignored it. And i think that was a powerful motive. I think the second was that both sides talked down to the voters, and, in a sense, the only thing that the two sides in the campaign had in common was a belief that anyone who voted for the other side must be ignorant or stupid or uneducated or even racist. And this actually did more damage to the government side than it did to the probrexit side. And all the exaggerated statements about being 4300 pounds worse off for each family did not have any traction, because people knew that no one could be that certain. So it looked as if there was a Propaganda Campaign going on. And i think if the government had said, you know, this is a difficult issue, there are arguments on both sides, which is why i understand why some of our colleagues want to leave the e. U. , and i am in favor of it, but the unwillingness to admit that it was a complex issue with arguments on both sides i think played particularly badly for the government side, because it played to the issue of trust. How can you trust these people when they are saying things that no one could conceivably know . Francine lord king, thank you so much for your time. Lord king thank you. Francine a decade after the last financial crisis, and some are predicting the next one is looming. In 2008, the biggest concern was that banks were too big to fail. Governments felt they had no choice but to prop them up or risk major meltdown. Jump to 2010 and enter philipp hildebrand, former economist, hedge fund manager, and central banker, he was ready to take on the lenders strongly advocating stricter capital requirements. Today on leaders with lacqua,