The world stands on the brink of a new financial crisis claims Lord King, former governor of the Bank Of England.
The next crash is coming ‘sooner rather than later’, he claims, because the world’s regulators have failed in their attempts to reform the global financial system since the 2008 meltdown.
Sooner rather than later
In his new book – The End Of Alchemy – Lord King says: “Another crisis is certain and the failure to tackle the disequilibrium of the world economy makes it likely that it will come sooner rather than later.”
He says that since the last crisis ‘governments and regulators have been hyperactive at the national and international level, but bankers and regulators have colluded in a self-defeating spiral of complexity.’
Lord King was at the centre of the storm when the 2008 financial crash broke. He was five years into his 10 year term as governor of the Bank Of England and played a key role in the £500 billion bailout orchestrated by Labour Chancellor Alistair Dowling and Prime Minister Gordon Brown.
He was responsible for the country’s interest rate policy and money supply and says that the ‘tripartite’ system of UK financial regulation which had been created in 1997 – The Bank Of England, the Treasury and the Financial Services Authority – failed to protect the country when the credit crunch began in 2007.
He says: “A major failing before 2007 was that the monetary policy framework, designed to deal with good times, and the lender of last resort, for bad times, were not properly integrated. In the crisis, massive support was extended not to save the banks, but in order to save the economy from the banks.”
The cause was not the failure of individual policymakers or bankers, Lord King argues, but ‘a system and the ideas that underpinned it’.
Unsustainably high and low spending across the world led to large trade surpluses and deficits, creating a ‘disequilibrium’ between major economies. This led to distorted interest and exchange rates which, in turn, led to bad investments in housing and property.
He now believes that the current extended low interest rates have fuelled asset prices and a desperate search for yield, leaving central banks ‘trapped in a prisoner’s dilemma’ – unable to raise rates for fear of slowing growth and causing another downturn.
Short term measures to maintain market confidence in the aftermath of the financial crisis have only served to perpetuate the underlying disequilibrium, he maintains.
“Only a fundamental rethink of how we organise out system of money and banking will, prevent a repetition of the crisis,” he says.
“Without reform of the financial system another crisis is certain and the failure to tackle the disequilibrium in the world economy makes it likely that it will come sooner rather than later.”