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Bankers Have Not Learnt The Lessons Of The Great Crash - Mervin King

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Link:http://www.telegraph.co.uk/news/uknews/12175490/Bankers-have-not-learnt-the-lessons-of-the-Great-Crash.html

By Charles Moore

10:00PM GMT 26 Feb 2016

Lenders are still taking too many risks with savers' money, warns former Bank of England governor Mervyn King

Barack Obama used to talk about the audacity of hope. Mervyn King was Governor of the Bank of England during the biggest financial crisis this country has faced since 1914. Its lesson, he says, is that we now need the audacity of pessimism. Only when we fully understand how badly things went wrong and why they are still wrong today can we start to put them right. His new book * suggests how.

I meet Lord King in his modest office at the London School of Economics. Typically, he is just off to the West Midlands for a dinner for famous sons of Wolverhampton. He is a proud provincial boy, not a City slicker.

I ask him to recall the moment he first understood the depth of the problem facing the world. Back in September 2007, when he it was already clear that Northern Rock would need support, King recalls, he was in Basel for a conference.

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There was alarm in the United States because sub-prime mortgages were collapsing. The central bank supervisors at the conference insisted that sub-prime failure could not bring down the system. But King talked to his friend Stan Fischer, then Governor of the Bank of Israel. They shared their fears: If the only thing that goes wrong is sub-prime, ok. But what else could go wrong? What if the unimaginable happens?

It did.

Over the next two months, says King, he became obsessed with the need for more equity capital in the banking system. The banks resisted at first and The politicians [Gordon Browns government] were susceptible to pressure from the banks. But we limped along till the bankruptcy of Lehman Brothers in September 2008. Then the banking of the entire industrial world was at risk of collapse.

Britain - without a proper bank resolution regime which, says King, could have solved the problem of Northern Rock in a weekend, without fuss - was enormously vulnerable. Whereas US banking sector assets were worth only 80 per cent of its GDP, Britains were worth 500 per cent, a terrifying ratio. New Labour, having turned its back on nationalisation, had to revert to it: It must have been galling for them.

"Car drivers have to take out third-party insurance before they can drive. Banks should do the same. They should have to take enough of their assets to the Bank of England that if things went wrong depositors could be paid off overnight. Then no bank run could ever develop."

Mervyn King

In Mervyn Kings mind, the credit crunch was brought about by something profoundly wrong. Bankers had been encouraged to take enormous risks with the customers money, enrich themselves and then dump the losses on the taxpayer. Huge pay increases for senior executives had produced a very unattractive culture when clever people started to say to themselves: Im smart, I can make money out of people who dont understand this.

More than 30 years ago, the young Professor King bought two shares in Berkshire Hathaway, the investment vehicle of Warren Buffett. They have increased by 161 times in that period, because Buffett doesnt take your money. He lets you invest alongside him. Extreme hedge funds, on the other hand, run a system by which the customer pays eventually amounts over 50 per cent of his total investment to them as fees. This just doesnt make any sense.

Warren Buffett

But financiers greed alone didnt cause all this. Economists had not allowed for peoples honest misjudgments; central bankers had failed to spot the symptoms of trouble in the years of prosperity and kept interest rates so low that people lost their understanding of risk; politicians had mistaken steady growth for permanent stability, boasting about an end to boom and bust. (That is a phrase which I, not King, drop into the conversation.

I can imagine who youve got in mind, he grins.)

The fundamental problem, he thinks, is that money and banking are the faultiest bits of the capitalist system, failing to allow for radical uncertainty about what could happen: As Governor, I never allowed my people to say things like

Our forecast is that inflation is likely to be three per cent next year. To deal with uncertainty, people need not the economists model of optimising behaviour, but coping strategies to handle the fact that stuff happens. There should be a convincing narrative about the economy, rather than a crystal ball.

Citizens have to be protected from the risks that banks always want to take with their money. This form of alchemy, says King, should not be outlawed, but it should be priced. When the Bank of England was lender of last resort in the 19th century, it worked quite well because 30 per cent of the banks assets were short-term government securities which the Bank could access as collateral.

'In 2006, before the crash began, that figure had fallen to less than one per cent. So when a bank went wrong, it was utterly bust and the burden fell upon everyone.

That problem still hasnt been solved, King thinks. But he has a suggestion. Instead of lender, the Bank should be what he calls pawnbroker of last resort. Banks risk-taking is objectionable only when they can evade the consequences. So the King plan says: Car drivers have to take out third-party insurance before they can drive. Banks should do the same. They should have to take enough of their assets to the Bank of England that if things went wrong depositors could be paid off overnight. Then no bank run could ever develop.

In speaking about all this, Mervyn King is careful not to place individual blame (or praise), including to himself. Historians, he says, will work out who got what wrong. His argument is about the whole system. He wants to find a way out of the prisoners dilemma by which good behaviour is rewarded only if everyone is bound by it.

So anyone searching his book for accounts of the late-night tantrums of Gordon Brown or the arrogance of Sir Fred Goodwin will be disappointed (although he does permit himself the aside that some of the great bankers in the crisis were easier to name than to shame). He is kindly Professor King, giving wise advice, not Governor King, titan of the financial establishment, settling old scores.

Gordon Brown and Mervyn King back in 2005

Gordon Brown and Mervyn King back in 2005

His courtesy and his mild appearance, which reminds one of the nicest rural rodents, can make one overlook his passion. He really [ital]hates[itals] the fact that the entire British population suffered at the hands of a system, and he fears that nothing since 2008 has corrected the serious disequilibrium in the world economy.

Real growth comes from innovation, whereas getting finance cheaply can be a distortion of the system. Im fighting against that the idea, which politicians like, that headwinds [George Osborne loves that word] are the only problem: its much deeper than that.

It is on the euro where Mervyn Kings indignation is most unguarded. Trust in money can work only if it goes with sovereignty: People have to feel theyve agreed who can exercise authority: These are the people weve elected.

In the eurozone, they cant. A fortnight ago, the governors of the French and German central banks wrote a joint article calling for either political union or a system in which each member state has debt responsibility and cannot be bailed out.

Yet the first has no political support - No one wants to be ruled by a single finance minister in Brussels - and the second had been tried, and failed. The eurozone, King believes, faces a struggle between political will and economic arithmetic. The decision to go ahead with monetary union was reckless and made by bureaucratic means not by democracy. That is a very dangerous development.

In Britain, our leaders tell the eurozone to get on with it, but We shouldnt encourage people to embark on a project for which there is no support in their own populations. Its not in our interest. It might explode later on.

When he was Governor, King said all this privately to his fellow central bankers, but the European elites have invested their careers in the euro and will plough on. They even thought that a euro crisis would be a good thing because it would force political integration. It didnt work: look at Germany and Greece. The creation of the euro was technically brilliant but politically disastrous, and the single interest rate in the zone means the inevitable loss of competitiveness.

Unlike the United States, with its Supreme Court, the EU does not have a proper constitution: in the context of monetary union, the decisions of the European Court of Justice have often been political. To make money work, you do need a sense of a nation. You shouldnt have government by a central bank, says the retired central banker.

Naturally, I try to draw him out on the coming referendum. He is cautious: voters need to listen to the arguments and make up their own minds. But then Mervyn King flashes his stiletto: I saw that letter from business leaders this week saying we should stay in. Some of them are the same people who said Britain should adopt the euro. Why on earth should we listen to them?

* The End of Alchemy by Mervyn King (Little, Brown)

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Erm. Moral hazard. Erm.

Helps when central bankers take the money and make sure they don't rock the boat - didn't see it coming, didn#t make any attempt to head it off, didn#t put in place anything to prevent it happening again.

I can't see this banker's book providing anything useful other to further line his own pockets.

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It is irrelevant what bankers need or need not do, bankers will sell their souls and yours to the devil for their own selfish gains, it is the governments since that have learnt no lessons. Cameron and Qsborne are like two little boys playing at grown ups, and two fibbing little boys at that.

Exactly,

Also the problems are appearing at a faster rate than there are being fixed. With yet more problems being created in the guise of fixing things.

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[Qoute]

I can't see this banker's book providing anything useful other to further line his own pockets.

Oh i dont know , one of our bedrooms has a wonky floor so the bed normally gets propped up with a book when the grand kids visit . :-) Now wheres my nearest bookstore.

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Helps when central bankers take the money and make sure they don't rock the boat - didn't see it coming, didn#t make any attempt to head it off, didn#t put in place anything to prevent it happening again.

I can't see this banker's book providing anything useful other to further line his own pockets.

+1

Historians, he says, will work out who got what wrong.

Yeah right. He knows full well that history is written by the (so called) winners or at least that'll be the version in the mainstream media and at the moment that's the crooked bankers and politicians so don't hold out much hope along those lines.

Even now there are attempts to rewrite history including his effort. Even if there are any sensible proposals how much notice is Carney (and his successors) going to take of them. Already the banks are doing stuff again like the stuff that started the economic collapse in the first place.

No mention in the article of crazy house prices.

Edited by billybong

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Just wondering what excuse the government of the day will use this time. I am one of a sizeable group of people who believe that the UK played as big a part in it's 2008 financial crisis as anything else, the USA sub prime was not to blame on it's own. Seven years on and we have already inflated the housing market to the point where owner occupied homes and rent just cannot mathematically go any higher without even more debt.

To be in this position only seven years later is just beyond belief. Of course it is bad when a country goes into recession like it was officially up to 2010, but like all these things good can happen, and in this case it should have been paying down debt and a rebalancing and cheaper homes, the so called recession post 2008 has yet to start for real.

Subprime was a distraction from the bigger issue but it gave a nice narrative.

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This is the man who dropped interest rates in 2003 when house prices had risen by 25%, this article is about him just shifting the blame for his utter incompetence.

He is wholly culpable, he was one of the ring leaders and he has cashed in for being so utterly useless.

He also was in charge for 6 years after the run on the banks, yet none of it was to do with him.

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Helps when central bankers take the money and make sure they don't rock the boat - didn't see it coming, didn#t make any attempt to head it off, didn#t put in place anything to prevent it happening again.

I can't see this banker's book providing anything useful other to further line his own pockets.

I agree that central banks were utterly ineffective at preventing reckless systemic risks from arising... and - to that extent - must receive healthy skepticism. I have found much of what Mervyn King has said (c.f. those choice quotes that are taken out of context by the media) to be candid, insightful and interesting. I was fascinated by the material in Greenspan's book - even though it left me rather unimpressed with the man himself.

Does anyone know if I can buy Mervyn's book yet? Is it really (only?) to be printed, as a series? In the Telegraph?

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Where was 'the raised eyebrow of the governor of the Bank of England' when house prices were rising by double digit percentages but wages were in low single digits, banks were handing out mortgages without checking income, the property118ers were filling their boots with interest only mortgages, Northern Rock were lending 125% LTV etc etc?

Edited by Dorkins

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This is the man who dropped interest rates in 2003 when house prices had risen by 25%, this article is about him just shifting the blame for his utter incompetence.

He is wholly culpable, he was one of the ring leaders and he has cashed in for being so utterly useless.

He also was in charge for 6 years after the run on the banks, yet none of it was to do with him.

+1

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Where was 'the raised eyebrow of the governor of the Bank of England' when house prices were rising by double digit percentages but wages were in low single digits, banks were handing out mortgages without checking income, the property118ers were filling their boots with interest only mortgages, Northern Rock were lending 125% LTV etc etc?

I don't intend to take on the role of 'defender of the BoE' - but, at the time of the Crash, Mervyn King (when giving evidence to the Treasury Select Committee) made it abundantly clear that the BoE were excluded from the task of regulating the operation of banks - a task that was to be the exclusive domain of the FSA. The same act that "gave independence to the Bank of England" (1998?) was accompanied by the "Memorandum Of Understanding" - an edict from the Treasury which made it absolutely clear that regulating commercial banks was not the remit of the BoE. The BoE was required to not intervene by government.

If you were to suggest that the FSA were a relentless shower of effluent, I'd agree - wholeheartedly. The BoE had been sidelined - at least until the abolition of the FSA; the return of regulatory responsibility to the BoE - and the founding of the PRA for that purpose. This happened after King had stood down. Perhaps the BoE would have spectacularly failed (as did the FSA - and, still, might the PRA) but establishing that would involve exploration of a counter-factual history.

Edited by A.steve

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Does anyone know if I can buy Mervyn's book yet? Is it really (only?) to be printed, as a series? In the Telegraph?

What! Why would you want to buy this idiots book? Anyone can be an incompetent prat. We don't have to pay him any more, he's taken enough from all of us to last a lifetime or two. He should be paying for a copy himself to give to anyone that wants to read the obvious!

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I don't intend to take on the role of 'defender of the BoE' - but, at the time of the Crash, Mervyn King (when giving evidence to the Treasury Select Committee) made it abundantly clear that the BoE were excluded from the task of regulating the operation of banks - a task that was to be the exclusive domain of the FSA. The same act that "gave independence to the Bank of England" (1998?) was accompanied by the "Memorandum Of Understanding" - an edict from the Treasury which made it absolutely clear that regulating commercial banks was not the remit of the BoE. The BoE was required to not intervene by government.

If you were to suggest that the FSA were a relentless shower of effluent, I'd agree - wholeheartedly. The BoE had been sidelined - at least until the abolition of the FSA; the return of regulatory responsibility to the BoE - and the founding of the PRA for that purpose. This happened after King had stood down. Perhaps the BoE would have spectacularly failed (as did the FSA) but establishing that would involve exploration of a counter-factual history.

I don't remember King making any noises between 1998 and 2008, despite his still influential role. Was it because he couldn't see the asset bubbles through those specs of his? And lets not forget he still had many more years to make sure the supertanker was pointing the right way....

Edited by Noginthenog

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"Real growth comes from innovation, whereas getting finance cheaply can be a distortion of the system"

From the man who started the Funding for Lending Scheme. Which gave banks cheap money, ruined saving rates and caused house prices to rise again ever since.

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I don't intend to take on the role of 'defender of the BoE' - but, at the time of the Crash, Mervyn King (when giving evidence to the Treasury Select Committee) made it abundantly clear that the BoE were excluded from the task of regulating the operation of banks - a task that was to be the exclusive domain of the FSA. The same act that "gave independence to the Bank of England" (1998?) was accompanied by the "Memorandum Of Understanding" - an edict from the Treasury which made it absolutely clear that regulating commercial banks was not the remit of the BoE. The BoE was required to not intervene by government.

If you were to suggest that the FSA were a relentless shower of effluent, I'd agree - wholeheartedly. The BoE had been sidelined - at least until the abolition of the FSA; the return of regulatory responsibility to the BoE - and the founding of the PRA for that purpose. This happened after King had stood down. Perhaps the BoE would have spectacularly failed (as did the FSA - and, still, might the PRA) but establishing that would involve exploration of a counter-factual history.

Yeah they love that excuse. "It wasn't my fault guv, it was the tripartite regulatory system". No doubt Merv was doing everything in his power to raise the alarm while trying to hold back the bubble with the powers he did have.

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I don't intend to take on the role of 'defender of the BoE' - but, at the time of the Crash, Mervyn King (when giving evidence to the Treasury Select Committee) made it abundantly clear that the BoE were excluded from the task of regulating the operation of banks - a task that was to be the exclusive domain of the FSA. The same act that "gave independence to the Bank of England" (1998?) was accompanied by the "Memorandum Of Understanding" - an edict from the Treasury which made it absolutely clear that regulating commercial banks was not the remit of the BoE. The BoE was required to not intervene by government.

If you were to suggest that the FSA were a relentless shower of effluent, I'd agree - wholeheartedly. The BoE had been sidelined - at least until the abolition of the FSA; the return of regulatory responsibility to the BoE - and the founding of the PRA for that purpose. This happened after King had stood down. Perhaps the BoE would have spectacularly failed (as did the FSA - and, still, might the PRA) but establishing that would involve exploration of a counter-factual history.

There were separate responsibilities (the tripartite system - the Bank of England, the FSA and the Treasury.) but even so I believe they all attended regular meetings and committees together. So it's not as if their operations were individually ring fenced or chinese walled with no channels of communication. For sure they would or should all have had a general understanding of what was happening in each other's departments (as each departments actions would have an effect on the others) even if they didn't each have any actual responsibility for the other departments. Some of the FSA statements afterwards wouldn't stand up in a tea room never mind in a financial committee responsible for the UK economy.

The separations were a (designed?) weakness in terms of responsibility but it wouldn't have been difficult to work out what was actually going on if they'd asked some questions - which they might well have done but won't admit to. It's also quite amazing that there doesn't seem to have been any attempts to remove evident weaknesses. Apparently no quality control or continuous improvement process for the process for them. Seemingly none of them spoke up.

Edited by billybong

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