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Bank chief: We failed to spot dangers of debt
Jonathan Prynn, Consumer Affairs Editor22 Dec 2008
The Bank of England today makes a startling admission of failure over the way it allowed the lending boom to end in a financial crash.
Its deputy governor Sir John Gieve conceded that the Bank did not understand the dangers posed by the £1.4trillion credit bubble that built up through soaring house prices and a consumer spending binge.
He called for new controls on bank lending to stop "crazy borrowing" accumulating to such unstable levels, adding: "This is a major storm, the like of which we haven't seen for 100 years, and I would be surprised if we weren't learning some lessons from it and we are."
He also warned about growing levels of bad debt in the mortgage books of Northern Rock and Bradford & Bingley now owned by the taxpayer.
In a Panorama interview tonight, Sir John said the Bank underestimated the impact that the bursting of the credit bubble would have on the real economy. "We didn't think it was going to be anything like as severe as it's turned
out to be ... Why didn't we see that it was so serious? I think that's because we, perhaps, we hadn't kept pace with the extent of globalisation.”
Sir John, who is to stand down in March from his role in charge of financial stability, admitted that the Bank did not have the right tools to rein in the explosion in credit. The Bank relied solely on changing interest rates to control the economy and sharp increases had not been an option.
He said: “If we'd used interest rates to try and address this asset-price credit growth, we would have been holding down the level of activity elsewhere in the economy, in manufacturing, in other services, holding down the level of employment at a time when consumer price inflation and earnings were stable and reasonably low.
“And people would have said, This is a wilful reduction in the prosperity of the country'. ”
In the interview with the BBC's Business Editor Robert Peston, Sir John said: “I think that one of the main lessons from this is that we need to develop some new instruments which sit somewhere between interest rates, which affect the whole economy and activity, and individual supervision and regulation of individual banks.
“Maybe we need to develop something which bridges that gap and directly addresses the financial cycle and prevents the financial cycle and the credit cycle getting out of hand ... I think we need to complement interest rates, which are a blunt instrument — you set one interest rate for the whole economy — with something which is more financial-sector specific”. The Bank used to have a much greater range of powers to rein in lending but many of these were abolished during the financial deregulation of the early Eighties.
The admissions from the Bank come on the eve of possible official confirmation that Britain is now in recession. Government statisticians are due to release revised estimates of GDP growth earlier in the year. If the second quarter figure, which was initially estimated at 0 per cent, is tweaked downwards, the figures would then meet the formal definition of recession — two consecutive quarters of economic contraction.
Sir John conceded that the knock-on effects of recession could have a major impact for the taxpayer, which now owns huge swathes of the banking system. Asked whether the taxpayer is likely to lose out, he said: “Well I think it'll be a mixed picture. I mean I think there are some [lending] books, Northern Rock, Bradford & Bingley, which the taxpayer is now holding which clearly have a level of defaults in them. I'm not quite sure how that will balance out against the residual of the capital. As for the more mainstream banks, yes I think they've got a commercial future and I'm sure that in time they will, as for example the Swedish banks have after their crisis, revive and start building and growing as commercial entities again.”
In a separate interview for the programme, Barclays chief executive John Varley said it will take up to two years for bank lending to homeowners, consumers and businesses to start growing again.
Reader views (44)
The failure of this government of finding capable people and the COMPLETE lack of financial COMPETENCE and supervision has been disastrous for Britain. Crash Gordon GO AWAY!!
- Jacqueline, Hampstead, London, 23/12/2008 15:46
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Gordon Brown...We don't want appologies...we want solution's to the problem...preferably without creating more DEBT for future generation's!!
- Carl Bennett, manchester, 22/12/2008 19:38
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We have too many Nu Labor hypocrits in government who all thought they were economic specialists following the biggest fool Crash Gordon!
- Jacqueline, Hampstead, London, 22/12/2008 18:55
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The capitalist system has to find new markets to absorb its surplus production. We now have a classical crisis of overproduction resulting largely from the superb activation of Chinese industry. An artificial market was achieved by the credit bubble. The bubble could have been absorbed if the inflationary spiral had been continued. All that was needed was a continuing depreciation in currency values. The crisis was triggered by the concerted international attack on inflation. But the essentials remain the same. If the present underlying crisis of overproduction cannot be addresses by a growing marklet demand, the consequence will be depressed economies. Therefore what is needed from BoE is not a mea culpa, but a policy response. The response must involve, perversely as it seems, a preservation of what remaimns of the bubble. The more gross examples have been exposed and eliminated. What is now needed is protection of the remaining credit market.
BoE has no need to admit failure.
- Geoff Herbert, Lara, Australia, 22/12/2008 18:32
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And finally John Gieve was surprised to learn that the 25th of December is to be named Christmas Day, this is despite receiving initial research data to the contrary.
He also acknowledged unconfirmed reports that the 1st of January will be known as New Years day. However he will not have a full report on the matter until June 2009.
- Dave Davies, Basingstoke, 22/12/2008 17:58
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The admission by the Bank of England's Deputy Governor for Financial Stability is astonishing. I sold my London flat in Feb 2007 because I anticipated the collapse in property valuations and marketability. In my opinion the Bank of England also could have taken appropriate action including insisting that mortgage lenders restrict any advances to 80% of property values. That would have been better than pumping cash into failing banks.
- Nick, West Sussex UK, 22/12/2008 17:56
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How hard is it to spot something is wrong when you are lending to people who do not have the ability to repay it.
- Rich, San Angelo USA, 22/12/2008 17:43
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This is an appaling admission to make and just shows how out of touch with real life these people are. Anybody with a modicum of intelligence could see what was coming and I am available to take the place of one of them on the gravy train as I can see no reason why any of them should keep their jobs.
- Roger Slade, Winchester, Hampshire, England, 22/12/2008 17:17
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It seems that the borrowers are the ones to suffer and be punished, when surely the lenders are the villains. If I asked for a loan valued at 125% of my assets and somebody lent it to me, then who is the irresponsible one? Somehow the law of prudent economics got suspended for a decade and the people who poured petrol on the pire have been saved by public money (money that doesnt actually exist...) Guess its too late to moan, but democracy and capitalism are the real losers. I shudder for my children.
- Colin Bond, London, 22/12/2008 16:59
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Pension mis-selling, to employees of Government and government related establishment institutions. Yes this time its 'reverse mis-selling' in otherwords, instead of being coerst into parting with your money and ending up with less than you started with, you end up with much more than you started with. And no inquiry. How cool is that?
- Colin Bond, London, 22/12/2008 16:47
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I guess the same bankers will still be in charge and ask for more of our tax money so they can keep paying their bonuses saying lesson's were learned.
- Ebin Donk, Angus Scotland, 22/12/2008 16:47
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I believe that Brown Blair most likely with the help of the EU and Mandelson took away the so called red tape Blair made a speech about it. They de regulated the Banks and this is the results, but I think Tony Blair knew this was on the cards when he suddenly stepped down for Brown he had been deciding for quite some time. I also think Brown knew about this two years ago when he was chancellor and I think he covered it up as he always does and made things look very rosy qwhen in fact is was not. I read while on holiday in Orlando in Sept a piece in the finance pages of either the Daily Mail or Express which are printed in the USA about the EU approaching the US regarding de regulation etc and the article went on to state that they did not think there was any malice in this. How do we know that this is what the EU intended so that the euro could take over from the dollar as the currency. at the moment most countries and the oil etc deal in dollars read what is happening to the US economy and ours Europe is not hit as hard as Britain and I wonder why. They have not reduced their interest rates yet as they said they would. I think we should put our interest rates up a bit not down. to encourage investors in the pound.
- Jacqui Williams, peterborough cambs, 22/12/2008 16:37
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This admission is nonsense. I have been saying for the last four years that the growth in the UK economy is totally driven by the annual £100Billion growth in household debt as supplemented by the £40Billion growth in government debt together with the increasing spending on civil service pensions. The Bank of England cannot now claim it was unaware. We the UK as a whole owe more than £3Trillion and are well past the point where the world will no longer fund it. The idea that the government model of the economy could have ignored the debt would suggest that they are both deaf and stupid. They are neither. We must therefore conclude that they like many less well informed chose to ignore it. An A level in economics would enable them to realise that growth totally driven by debt is merely a bubble that must burst. GDP growth as measured in the UK is related to consumption rather than production. Thus this bubble is massive between £800Billion and £1.1Trillion. So, even a 5% contraction in consumption will take about five years of pain.
- Max Mentor, Gerrards Cross, 22/12/2008 16:22
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With morons like this running the UK govt you should not be surprised by the crash of the £. After these new comments get around the world wait for a further fall. Pathetic, lying imbeciles. Good luck UK.
- Kr, Florence Italy, 22/12/2008 16:17
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Answers simple, with the government relaxing gambling laws such to the extent to that of I can't walk down the highstreet, open a newspaper or listen to the radio without hearing about bookmakers (I mean highstreet arcades with Fixed Betting terminals that are a massive cash cow for the government and the bookmakers themselves). The Govt could allow the bookmakers to reach every single household via the internet until the whole population is a gambling addict, when not using these internet casino sites annd bookie sites our TV stations will only be allowed to broadcast TV Roulette, Bingo or shows where there is a premium rate competition at the end of it, and when watching this whilst scratching the umpteenth losing scratch card and going on the National lottery where half the money seems to disappear of which I had to walk past a bookmakers either side of the shop to entice me in, The national debt would be paid back in no time by seducing society into gambling all their hard earned wages, pensions and savings. Does this sound like a plan or is it happening already? Oh but don't mention the supercasinos, the government told us they would be bad for Society!!!!
- Dc, London, 22/12/2008 15:55
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It's all very well when these high flyers make an apology for their mis-management and incompetence but are they willing to pay back any of their vast amounts of ill-gotten gains. I'm sure they won't be to concerned about heating their homes or paying the private school fee's for their children and I'm also sure that Gorgon Brown and his party of misfits won't be looking to ask for anything back..
- Arthur, Bracknell UK, 22/12/2008 15:35
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In the past two years I have writen to several newspapers, including this one,about the madness of this credit bubble. None of my letters were published.I am not a financial genius ,just a 60 year old without any borrowings.It is very worrying indeed if the people running the Bank of England and the country can be so ignorant.They were all in awe by the so called wealth creating and money making ideas of the City of London which turned out to be one great casino with very few regulations.
- Adrian, London UK, 22/12/2008 15:03
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We need complete separation between commercial/industrial credit and that for personal comsumption. There is no doubt that consumers got 'pigged out' on credit from banks all too anxious to lend without consideration as to how such credit lines were to be repayed. Banks have to tightly regulate lending with reference to risk and Banks in turn have to be stricly regulated by and independent Bank of England - not by a puny FSA. With regard to credit lines for business and manufacturing - that needs to be dealt with by Banks specifically set up to deal with that lending purpose but with interest rates set at a different but lower level to that for lending for consumption. In my view the essestial tool is separation of these two purposes for handing out credit
- John, Leighton Buzzard, Beds, 22/12/2008 14:31
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Pathetic. If lil ole me can spot a crisis waiting to happen 3 years ago, I'm in the wrong job.
- Jw, London, 22/12/2008 14:24
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I bet you and yours didn't fail to get large bonuses, now did you! It will not end until we deal or start to deal with the problem!! Lying-Nu-Labour are the problem not the cure.
Cameron should be horse whipped for not tearing this deluded bunch of students that have never grown up and faced the real world. It's so wonderful to be magnanimous to all in-sundry but who is going to pay for it? "it's called irresponsible acts and there unintended consequence, they can't face"
If European governments can't stand up and face reality instead of all this luvvie luvvie tree hugging nonsense Europe will be ablaze with in the next 5 to 7 years.
- Mike,, London, 22/12/2008 14:01
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These are the people who are paid millions to run the financial system...and they couldn't. Now they expect us to trust them to sort it out...and continue paying them millions to do so. Exactly how stupid do they think we are?
- Nick, London, 22/12/2008 13:38
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It's not enough for senior Bank of England officials to admit such 'deficiencies', the real accountability for the high levels of debt in the Uk rests with "prudent" Gordon Brown. The government is accountable for putting people into key roles in the BofE who "didn't understand" the potential impact of the housing/debt bubble (despite Conservative & Lib Dem protestations). The Government is also responsible for both monetary & fiscal policy. Goedon SHOULD have known and SHOULD have done something to prevent it. What's his solution now - to borrow EVEN MORE. america might have caused the credit crunch, but Gordon has caused the recession in the UK and the growing mountain of public debt.
- Malcolm, London, 22/12/2008 13:37
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It's such a shame that all the self appointed financial experts here weren't giving us the benefit of their fantastic wisdom two years ago before we got into this mess, or is their brilliant insight only retrospective?
- Nj, London, 22/12/2008 13:33
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This is the most scary thing of the whole situation.
If numerous members of the general public could see it, why couldn't these professionals?
- Lb, London, 22/12/2008 13:08
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If the BOE didn't see the asset bubble, they're not very bright but it was their job to manage inflation through interest rate setting, not to run the whole economy; that was Gordon Brown's job. Had he kept an inflation target based on the Retail Price Index rather than the Consumer Price Index (which excludes housing costs), then the BOE would have kept interest rates higher in response to asset inflation, avoiding some of the unsustainable lending that is now being exposed. Mr Brown's turn to apologise.
- Cary, London, 22/12/2008 13:02
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The bank of England were the only ones who failed to spot the dangers,they were warned time and time again by the IMF amongst others.I don't believe a word of it,thay chose to ignore the evidence before there own eyes in the hope of making a fast buck,and thay did make a fast buck,and got rewarded with tax payers money for it.Its a total disgrace,if you or i had acted so irresponsibly we would be in prison now.
- Kev, London, 22/12/2008 12:59
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But we would keep our bonuses and above inflation pay rises. This as per our job contract and there is nothing illegal. Else we would sue Govt for failing to meet the contracts obligations and would take billions more in payoffs
- Prasad, SIDCUP, 22/12/2008 12:48
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What a load of bull, the BOE didn't realise ? I strongly suspect they warned brown and his cronies but they were all to happy for things to continue as the tax revenues came rolling in. Watched an interview with our old friend mandy and he stated "The government though they could manage the bubble". In 1997 brown addressed parliament and said "I will not let house prices spiral out of control and ruin the economy". enough said
- Chris Smith, Rochester, 22/12/2008 12:42
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Didnt they read and give any heed to the warnings being given over the years by Liberal and Conseravtive party politicians
But then as a Gordon Brown and Labour party controlled Quango, you would not expect the monetary committe to think for themselves anyway
- Howard, Herts UK, 22/12/2008 12:39
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Watch out savers as this thing goes on, Unelected Brown and his Cronies Darling and Mandelson will be after your savings. They will think of some hide behind crummy scheme to get their grubby little hands on your money.
- Ebin Donk, yo1 6ds, 22/12/2008 12:31
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I don't know we seem to have scientists studying for years to tell us the obvious,politicians spinning us a lot of nonsense thinking that we don't recognise it as such and now bankers telling us that they didn't realise that the lending boom would finally cause a big crash.I live in Italy,a country that has always been given a low rating by the various rating companies,can these companys explain why Italy up till now doesn't seem to be in the terrible situation countries like GB and the USA are?could it be that the population itself is more prudent.
- Linda, italy, 22/12/2008 12:21
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Brown was the main architect of our problems and he was not even elected. He was a useless chancellor and now he's a useless PM. The dangerous thing is that he even believes the fairy tales he keeps telling us. He plays the blame game perfectly. Sack him, sack the head of the BOE and vote them out.
- Frederick, London UK, 22/12/2008 12:13
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The Bank is absolutely correct to apologise and so should Mr Brown. He told the World that he had abolished boom and bust and so the banks kept lending on that basis and people kept borrowing on that basis. It was mis-selling on a gigantic basis and Brown was the worst offender. Trust him now? You would have to be mad to do so!
- William, London, 22/12/2008 11:48
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There is a good side. With no credit perhaps Experian will go bust too.
- Bj, London, 22/12/2008 11:46
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Well at least Sir John is owning up to the fact that the UK has got a very serious debt problem. Will Gordon Brown and the rest of Labour continue to blame America for this crisis?
The first thing the BOE can do is to recommend the removal of all cut price rate offers on mortgages, which do not bear any relation to the actual interest rate. If the buyer can not afford the full rate they should not be buying. In reality they will not miss out, as house prices will have to stay at levels where buyers can afford them.
Also the current low mortgage rates are only a temporary undeserved bonus. Rather than mortgage holders be getting away with only paying the much reduced amount now. They should have been required to keep on paying their old monthly payments. The surplus being used to pay off debt, the root cause of the problem. Allowing them to have the money to spend on imports only ensures that this crisis will last longer. As it is, when we are forced to put rates back up probably before the recovery starts. We are likely to see a resurgence in defaults. A payment surplus on mortgage accounts would have cushioned against this, without the need for further Government aid.
For future stability, I would make it a requirement that the minimum mortgage payment for all, must be equivalent to that required at a rate of 6%. The ups and downs in the market will be smoothed. Anyone who is facing temporary difficulties can be accommodated easier if they have a payment surplus.
- Harry H, London UK, 22/12/2008 11:18
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We didn't realize? You couldn't make it up, could you!
- Robert, Phuket, Thailand, 22/12/2008 11:13
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Is this guy for real??!?!?
- Eddy, London, 22/12/2008 10:58
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Sir John Gieve admits openly to the failure of the financial authorities to monitor the reckless lending
of the banks.This reinforces the claims of others that Gordon Brown when Chancellor of the exchequer failed to recognise that he was creating a monstrous economic calamity which we are all now paying for
- Alex Pomeroy, london, 22/12/2008 10:37
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Congratulations Bank of England,. Your plan worked just fine... Employ someone from the Home Office like Sir John who hadnt a clue about banking and then make him the Fall Guy, Genius....
- Dc, London, 22/12/2008 10:27
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in 1988 we had 100% mortgages which eventually led to a really bad recession.Now we have had 125% mortgages and these bunch of idiots could not see what was going to happen.Straight out of university never had a real job such a pathetic bunch of PLUMS.
- Edwina, croydon, 22/12/2008 10:07
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I can't believe that this man is the deputy guvernor of the BOE and he could not see this financial crash coming is he blind and deaf.I saw it coming two years ago. House prices going through the roof, banks lending money like there is no tomorrow.He and his boss should be sacked with no pay off.
- Phil George, Castro Marim Portugal, 22/12/2008 10:00
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so how comes they all keep their jobs when they knew about this years ago???
think they should be next to receive their P45s
- Joanna, London, 22/12/2008 09:56
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utter cobblers!! For years I would walk around the shops thinking how do all these people afford to shop like this every weekend when the national average salary is only £25K. I would look on the roads and think not everyone is earning a £100K+, enough to drive a new porsche etc. I have a new instruement that could be used - its called common sense.
- Fly, london, 22/12/2008 09:53
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We do not need all this waffle. In reality they let pure greed overcome any vestige of common sense!
- Michael, London, 22/12/2008 09:49
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