Redactor: Inna Grinis
Fri, 25/11/2011 - 17:00 - 17:45
St John’s College, Cambridge Quincentenary Lecture
by PROFESSOR SIR MERVYN KING, GBE FBA
Governor of the Bank of England
“The Global Financial Crisis"
In 30 minutes the Governor presented the emergence and the development of the global financial crisis. His main message was that it is important not to confuse symptoms with causes.
The latter go as far as the collapse of the Soviet Empire and the disappearance of an alternative to capitalism. From the late 1980s emerging economies started adopting market reforms and focusing on trade surplus growth. Capital flew not from the developed world to the developing one, as common sense would suggest, but the other way round. For instance China accumulated $3 trillion of Treasury bills by 2011. Unfortunately the recipient countries did not have enough profitable investment projects, and this inflow of cheap money pumped consumption to unsustainable levels, and translated into bubbles in housing and stock markets.
Mervyn King stressed that imbalances are the major cause of this crisis. In the context of Europe competitiveness disparities have accrued since 1999 with Nordic countries, such as Germany or the Netherlands, running 5% trade surpluses, while the periphery countries accumulated 10% deficits. Someone had to finance these, and until last summer this role had been undertaken by the private sector. The Bank sector debt rose from 100-200% of GDP to 500%. However this could not last forever, and the liquidity crisis began on the 9thof August with BNP Paribas Investment Partners freezing their three investment funds, and the BCE injecting 94.8 billion euros into the financial system.
The actual amount of subprime mortgages was not big enough to provoke such a crisis. It was the huge amount of bets on the mortgages - whether they would be repaid or not - that plunged western economies into this crisis. After BNP Paribas’ filial had suspended its three investment funds, it turned out that all the big banks had been involved. The sum of gains and losses should have been zero, but simple economic arithmetic could not work in this case since no one knew who the real gainers and losers were. Mistrust took place and banks stopped lending to each other. Indeed banks’ leverage dropped from £50 to £20. Governments had to save these banks by recapitalising them, but at the time no one asked whether they could afford doing so. Hence debt was transferred from the finance sector to the public one.
The Great Panic has already destroyed 3 million jobs, and, as the Governor said at the beginning of his speech, no one has the ability to forecast the future.
