Describe your thoughts on setting policy.
Monetary policy got itself into a cul-de-sac where it didn’t take financial markets seriously. We need to provide a lot of stimulus to the U.K. economy. We’ve got big headwinds from Europe, from the currency, from ongoing deleveraging. But that stimulus can create risks. We need to take other steps in order to reduce those risks, because if we don’t, we’re going to create bigger problems, and we’ll have to pull back too soon on monetary policy, which is the last thing we want to do. If you do smaller things early on, you don’t have to do really big things later. There’s an element of anticipation, and that’s what we’ve tried to do in the U.K.
You talked about the recovery in a speech this week. Where does it stand?
The true recovery is beginning, because the core of the systems is repaired. But we’ve yet to see businesses really starting to invest, really starting to believe. And the uncertainties are really about the future of demand. Is it going to be robust, or can I wait another quarter—and another quarter? I feel pretty comfortable about the near-term outlook, but the longer term is going to turn on these bigger questions of demand and what happens to productivity.
What’s going to trigger growth in demand?
Households are still right-sizing their balance sheets. They’re still saving a lot more than they were before. If you look at the situation in the U.K., we haven’t had that productivity growth you need to get real wages growing. We’ve had a pretty sharp pickup [in growth] in the last several months, because households have moved away from extreme levels of precautionary savings. But that only proceeds if incomes start to grow in subsequent years. The dynamism is not yet there. And it won’t be there, won’t even begin to appear, until the work that the European Central Bank is doing on fixing the banking system over the course of the next year is completed.
You were governor of the Bank of Canada when the crisis hit. How did Canada get off so lightly?
First, we saw very early on some of the worst excesses of the shadow banking system. We realized the scale of leverage in the system in the fall of 2007. That made us move a little quicker than some. The second thing that I think contributed is that we had some very simple regulations, a leverage ratio that was a very simple test: How many assets do you have relative to your capital? That helped save the core of our system from the worst excesses that were seen in the U.S. and—it has to be said—the U.K.
What’s the best way to make the next crisis less of a catastrophe?
We need financial markets that are more resilient, more like the equity market. We didn’t like the prices of equities in the fall of 2008, but we could get a price, could transact. You couldn’t transact if you were trying to borrow short-term. These are trillion-dollar markets that shut and brought the system down. We understand we have a continuing role to keep those markets functioning.
When you look at the world right now, what worries you?
I’m paid to worry. The challenges facing China are considerable. They were always going to face issues in terms of rebalancing their economy. But getting the sequencing right, getting the magnitudes right, will be extremely challenging. And we need to have the patience to recognize that the timetable that’s right for China may not fit perfectly the timetable for advanced economies.
You mentioned stimulus. What about austerity?
The rhetoric in that debate quite often didn’t match what was happening. The scale of austerity in the United States in the last year has dwarfed anything in Europe. You wouldn’t necessarily have known it by the way the U.K. was compared to the U.S.