Outgoing Bank of England Gov. Sir Mervin King said economic problems are manageable in a New York speech Dec. 10. He also called for an end of “Too Big to Fail” banks and special interest policies.
“These problems are all manageable. Manageable though they are, they have to be done,” said Sir Mervin King at a luncheon speech before the Economic Club of New York Dec. 10. He referred to the standard economic problems that are often addressed by central bankers: A slow economic recovery, banks that are unwilling to lend and structural imbalances in world trade.
Having joined the Bank of England in 1991, King became governor of the world’s oldest central bank in 2003. He will retire from the post in July 2013 and Mark Carney of the Bank of Canada is the designated successor. In one of his last speeches, the outgoing governor certainly did not disappoint the New York audience, with William Dudley of the New York Fed and Glenn Hubbard of Columbia University in attendance.
Often when public officials and politicians have little time of service left, they start to become more outspoken. King, having little to lose with a fully accrued annual pension benefit of $318,467, also went beyond the common central banker script. The Fed’s Ben Bernanke or the European Central Bank’s Mario Draghi often dwell on topics such as banks’ unwillingness to lend or the slow recovery, not so King.
King Says Need to ‘Stop Too Big To Fail’
Although other central bankers have spoken about the topic before, King was vocal in saying that is it pertinent “to rid the world of the problem of ‘too important to fail.’” This concept describes multinational financial institutions that are so big and so complicated that their bankruptcies would threaten the whole financial system.
The prime example of ‘Too Big to Fail’ would be the investment bank Lehman Brothers, which went bankrupt in September 2008, bringing the global financial system to the brink of collapse.
“We are intent on putting in place a ring-fence around those banking activities that are absolutely crucial for the operation of the domestic economy: Retail deposits, the payment system and financing small businesses, “ he said, not mentioning investment banking and financial speculation.
On the other hand, he says that the U.K. is developing a process through which large banks can be liquidated in an orderly fashion. “We need a framework whereby these banks can be resolved,” King said. He added that lenders and investors need to understand that there are risks involved when lending to financial institutions. “They are not lending to the government with a guaranteed return, they are actually taking a genuine financial risk,” he says.
He added that the community of international regulators is taking this issue seriously. Regulators would have to work together in order to insure the orderly run-off of large banks. King believes that there won’t be a standard international framework but that each national regulator will make sure they have a procedure in place to deal with such an event.
Legitimacy of Market Economy Needs to Be Defended
Another interesting point that has not been prominent among central bankers is the topic of special interests and lobbying.
“We face a broader challenge, a challenge to defend the market economy in the face of concerns among those who suffered during the economic crisis,” says King and notes that the legitimacy of the market economy has suffered as a consequence of special interest and lobbying.
There is “the need to slow the march of special interest and the march of lobbying,” he adds as many ordinary people have suffered because of the financial crisis but benefited only marginally during the boom.
According to King, special interest groups benefited disproportionately from the boom and did not lose much during the bust. He did not mention banks specifically, but in popular opinion it was mostly banks and their employees who benefited for the boom and ordinary workers that paid for it.
“We need to ensure … that a market economy is seen to be perceived by opportunities and a sense of fairness,” King concluded, although he did not provide any details as to how that could look like in practice.
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