♪ lord king: it is difficult to exaggerate the severity and importance of these events. not since the beginning of the first world war has our banking system been so close to collapse. francine: mervyn king was at the epicenter of the biggest exercise in crisis management in modern financial history. he was in charge of the bank of england in 2007, pumping billions of pounds into the economy. joining me on "leaders with 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. 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 need to worry not just about the amounts of of equity capital banks issue, 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 to do that. francine: did we see early signs of it, or were we late to the game?

lord king: i think we saw signs of it in the economy, and we should have given more weight to the rise of leverage in the borrowing of the banking system. of course at that point, the banks themselves were deeply reluctant to admit 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 weren't.

i don't 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: with hindsight, would you have done something differently to placate this nonconfidence? lord king: i think the things we had to do were well-known in the u.k. and had been identified before. one was we did not have a resolution framework to deal with the failing of the banking in the u.k. every other g7 country had one. we did not have 100% deposit insurance. and that was bound to mean once a bank run were to start, it would be rational for other depositors to join it. and these things were understood and well known. i don't 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, 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 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 iraq? lord king: we were the lender of last resort right up and to 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 people seem to think we did not lend to northern rock. we lended a vast amount to

northern rock. and the first conversation i had with the chairman of northern rock in august 2007 was if it comes to that point, we would be there as a lender of last resort. the problem was, northern rock, which was not doing anything other banks themselves were not themselves doing, had a business model that ended when the market in mortgage-backed 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 was just that the structure of the bank, which was basically borrowing short and mortgage lending, meant they were not required to hold very much equity capital. and that is what made them very vulnerable. 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 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 never would have become the news story it became. after the fall of lehman brothers, it was obvious that there needed to be a coordinated signal that we would do whatever was necessary 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 a cut in interest rates, we agreed that he would speak to jean-claude trichet, and i would speak to some others, and it became a g10 movement. it took about a week 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. 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. he has done so in action around the world in which u.s. fed has cut interest rates by 0.5%, the ecb by half a percent, 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: and among other people inside the central banking world, we did not brief the political world because that, i'm afraid in modern circumstance, means inevitably a leak. that was one thing that would and have undermined the operation. francine: is that what makes the

big difference between the central banks and the politicians? lord king: yes. i can -- 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 and procedures institutions like the university of cambridge, harvard, and m.i.t., where his office happened to enjoin 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 full 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 business? lord king: very much so. one reason i started a charity to encourage 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. 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 just 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 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. he could have gone to university had his parents been able to afford to send him. and he couldn't. 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 don't

go to college, who by and large unless, should pay for people who do go to college who thereby earn more later in life. but nevertheless, it is tougher for the younger generation. i think it is beholden on the older generation to recognize 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 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 moment to moment movement in financial markets because it was not clear that it 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 in tim being able to interact with people around the world because he knew them all. i think if he 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. 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 a s.he right solution 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 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 the problems that were coming up were not unheard of. we knew that these problems had occurred in the past and what we had to do about it. i don't 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 by putting money out there. lord king: 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 buying assets, 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 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 the market, and later in life, when it comes to sell them, they might be selling at much lower house price levels relative to their income. 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 don't think central banks have any responsibility for what has been going on. because this is partly a function of technology, 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 for the country as a whole from having these cheap imports from china, but we must as a society protect 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. ♪

>> the governor of the bank of

england, sir mervyn king. francine: in 2013, mervyn king stepped down as the 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 higher amounts of debt, which because the amount of debt in the world today is higher than it was years ago. 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 knock-on effects and lead other people to default. i think once that happens, you may find 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. 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 don't 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 don't 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 now that there is an easy way to improve people's living standards, when there is not, and in terms of thinking that now, 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 -- politically, the only way to deal with that is have a second referendum and argue that we should reverse course.

francine: do 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, that 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 customs union, that we are ready to do that. but having made that position clear, the u.k. would then be, first of all, be able to announce its 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 has what was the position of the manifesto in both major parties, who afterward increased their votes, and yet to say at the same time but 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 the 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 pro-brexit side. and all the exaggerated statements about being 4300 pounds or 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 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. ♪

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