Bank 'did not understand crisis'

[Legal Beagles]

The Bank of England did not understand the severity of economic problems before the current crisis, its deputy head says.

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[enaid]

Re: Bank 'did not understand crisis'

The Bank of England did not understand the severity of economic problems before the current financial crisis, its deputy governor says.
Sir John Gieve told the BBC that the Bank knew "crazy borrowing" was taking place and the price of houses and other assets was rising unsustainably.
But the Bank thought this problem was less serious than it turned out to be, he said in an interview for Panorama.
The Bank relies too much on interest rates to control the economy, he added.
Sir John, who will be stepping down next year, also sits on the Bank's interest rate-setting committee.
In the interview with BBC business editor Robert Peston, he said interest rates were "a blunt instrument", because they affected the whole economy.
There are some books... which the taxpayer's now holding, which clearly have a level of defaults in them
"We need to develop some new instruments, which sit somewhere between interest rates, which affect the whole economy... and individual supervision and regulation of individual banks," he said.
"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."
Commercial future
Sir John has specific responsibility for financial stability.
He was savaged when interrogated last autumn by the Treasury Select Committee for allegedly being insufficiently on top of the crisis at Northern Rock. His colleagues regarded the attack as unfair.
In his BBC interview, he cast doubt on whether the exchequer would get all of the money back that it has pumped into the banking sector.
"There are some books: Northern Rock, Bradford & Bingley, which the taxpayer's 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," he said. "As for the more mainstream banks, yes I think they've got a commercial future and I'm sure that in time they will... revive and start building and growing as commercial entities again." Meanwhile, the boss of Barclays bank tells the programme that consumers and companies will continue to find it difficult to access credit for the next one to two years.

[enaid]

Re: Bank 'did not understand crisis'

The Bank of England did not understand the severity of economic problems before the current financial crisis, its deputy governor says.

Well maybe it was being written out for them by the same people that write the T&C's for us. You can see the problem then with 'understanding' :grinningelf:

[Legal Beagles]

Financial crisis: Bank of England 'did not understand problem', Sir John Gieve says


The Bank of England underestimated the severity of the current financial crisis, according to its deputy governor who has admitted that interest rates are only a "blunt instrument" with which to control the economy.

Sir John Gieve told the BBC's Panorama programme, to be screened tonight, that new tools are needed to complement rates. He also admitted that the Bank knew "crazy borrowing" was taking place and the price of houses and other assets was rising unsustainably, but did not fully understand the problem.

"We didn't think it was going to be anything like as severe as it's turned out to be," says Gieve, who is in charge of financial stability at the Bank. "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. So the upswing here didn't involve the big increases in earnings and consumption and activity which we saw in previous booms. We saw the credit, we saw the house prices, but we did see a fairly stable pattern of earnings, prices and output."

Explaining why the Bank did not raise interest rates to curb the lending and house price boom, Gieve says: "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, you know, 'this is a wilful reduction in the prosperity of the country'."

The Bank cannot just rely on interest rates to control the economy, he argues. "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," Gieve says.

"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."

"This is a major storm we haven't seen the like of for 100 years," he adds. "It would be very surprising if we weren't learning lessons from it and we are."

Gieve also casts doubt on whether the Treasury will get all of the money back that it has poured into the banking sector, pointing to a "level of defaults" in the books of nationalised lenders Northern Rock and Bradford & Bingley, which are now held by the taxpayer.

Speaking on the same programme, John Varley, the chief executive of Barclays, predicts that consumers and businesses will struggle to access credit for the next one to two years.

• Interest rates
• Bank of England
• Interest rates
• House prices
• Housing market
• Northern Rock
• Bradford & Bingley
• Barclays

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[righty]

Re: Bank 'did not understand crisis'

I have serious doubts that this is true. I think they knew but buried their heads in the sand & did'nt communicate their dire thoughts with each other.

It's my understanding that the main topic of discussion around the dinner tables of aids & finance economists to the US regulator in Washington was the dodgy state of the worlds finances based of derivatives which no one understood