The Big Issue: What lessons can we learn from the financial crisis of a decade ago?
Mervyn King: There are two lessons that we should apply now. First, ask the question ‘What is going on here?’ – this may seem banal, but it is not. In the financial crisis everyone focused initially on the symptoms – the shortage of liquidity and funding for banks. But the underlying cause was deeper – banks were unable to absorb potential losses because they were ‘undercapitalised’, in other words, they had not issued enough equity shares to absorb any losses that might arise from an uncertain future. Today, we need to find out the true spread of the virus before we can form any reliable predictions about the future path of the disease. Second, once the immediate epidemic has passed we need to boost the resilience and robustness of our health system. That was not done for the banking system before the financial crisis. The big ideas behind these lessons are discussed in the new book by John Kay and myself entitled Radical Uncertainty, published a few weeks ago.
Was the financial system altered to safeguard against future economic disasters?
After the crisis, the regulation of banks was improved to make them more resilient and robust. Because we live in a world of radical uncertainty, in which it is not possible to assess the probability or nature of any future crisis, the assessment of how resilient and robust the banking system should be is a matter of judgement. I would like to see us go somewhat further than we have. But this is a judgement, not an objective fact.
Has society become too complacent in expecting long-term steady growth and therefore doesn’t realise the reality of a serious, long-term recession?
After a long period of peace and prosperity, there is always the risk that we feel we are superior to past generations in preventing catastrophes. We are not. We need to use our greater prosperity to build in greater resilience and robustness of our economies, health systems, electricity supply and other key parts of our interconnected society.
Should we have been able to predict a threat like the coronavirus? What steps could have been made to prepare us?
The spread of a virus such as Covid-19 was always a likely event and was indeed discussed on page 40 of Radical Uncertainty. But it would have been impossible to predict precisely when or where such a virus would lead to a pandemic, nor the precise nature of the virus. In future, I am sure that we will take steps to improve our ability to expand rapidly the number of intensive care beds in hospitals at short notice. Resilience and robustness of key systems are an important element in coping with radical uncertainty.
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What did it feel like to be in the driving seat when things seem to be spiralling out of control?
Coping with the financial crisis and its aftermath continued for several years. The pressure of long working hours grew to levels that induced tiredness. But as governor I had such tremendous support from the team around me that it would be wrong to call this stress. I think of stress as something when an individual is alone and unable to work out easily how to cope with the demands of supporting his or her family. The worst stress today will be felt by people whose income has collapsed and who are worried about how to pay for food and shelter.
It seemed like the economy was only starting to fully recover from austerity measures. How long do you think it will take for us to return to a situation like we were in only a couple of months ago?
There are two important questions here. First, once the initial pandemic has subsided, how quickly will the economy recover? Second, will the economy recover from the distortions that led to the financial crisis? On the first, much will depend on whether sufficient immunity has been built up in the population to bridge us to the point when a vaccine is widely available. There is no reason that the sharp contraction of the economy resulting from the enforced separation measures to counteract the spread of the virus cannot be reversed quickly. On the second, a wider rebalancing of both our own and other major economies will be necessary before we can return to the growth rates that we experienced before the crisis.
What does history tell us about how societies recover from major catastrophes like this?
It can be dangerous to generalise. But even major catastrophes, such as the Black Death and world wars, seem to have rather little impact on the long run level of output and incomes. But they can leave lasting memories which affect our politics and attitudes. Let us hope that we draw the right lessons from this crisis and recognise that even in times of peace we need to help each other both at home and abroad.
Radical Uncertainty: Decision-Making for an Unknowable Future by John Kay and Mervyn King is out now (Bridge Street Press, £25)