Financial crisis is 'just like Le Tiss taking a penalty', says Bank boss (From Daily Echo)

Bank of England boss Mervyn King visits Southampton

6:00am Friday 19th June 2009 in Financial Crisis Exclusive By Gareth Lewis, Business Editor

Mervyn King (right) at St Mary's Stadium with Bank of England Agent Chris Piper

“IT’S like Matthew Le Tissier taking a penalty”.

That’s how the Governor of the Bank of England described handling “the worst financial crisis the world has ever seen”.

“You and I would find it very stressful to take a penalty in those circumstances but that’s his job and it was our job to deal with that,” said Mervyn King, fresh from a tour of St Mary’s Stadium in Southampton.

The governor was in the city as part of a two-day tour of the county, taking in Southampton Airport, the Ordnance Survey headquarters and talking to business leaders to hear first hand how the global recession was biting in Hampshire.

“I tried to give them an honest picture,” he said. “Obviously it doesn’t need me to tell them how traumatic the downturn is.

“We are seeing now some signs that the rate at which outlook was falling is beginning to flatten off but I don’t think anyone should draw strong conclusions.

“No one knows what will happen. It’s very easy to lose confidence quickly and indeed it was lost in a very short period of time. You can’t regain it quickly, so it’s bound to take a lot longer to recover than it was to fall into recession, which was a very sharp fall in activity over the last six months.

“I don’t think it would be sensible to expect activity to pick as quickly.”

Forecasting when business will boom again is practically impossible, he says.

“It will take longer but precisely how long and how rapidly activity will recover I think it’s very hard to judge.

“We are in unknown territory and this is undoubtedly the worst financial crisis the world has ever seen. We got to a point last October where two of our largest banks were right up against it and were very close to failure and steps had to be taken to re-capitalise the banking system.”

He arrived the morning after making headlines across the country with a high profile speech in the City demanding the banks be reined in.

“One of the lessons we’ve learnt is that you can’t expect a banking system to function properly if the very big banks feel like they’ve got a state guarantee. So, we have got to find a way round that and one of the things I discussed last night is whether we can develop a resolution processes, which is essentially a form of insolvency law for banks which is different from that of ordinary companies. It’s important that somebody takes over the bank before it gets to the point of failure.

“Having an ability to wind down a very complex and big organisation that can cause problems elsewhere means that the managers of those organisations know they could be wound down. At present they can hold a gun to the authorities’ head and we can’t afford to have that happen.

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“Then there’s a question of how far you put some blockages in the way of some institutions becoming very big or mixing together activities that the state does want to insure – retail deposits, you know the little old lady with her bank account. If her money is going to be used to finance very speculative and risky investments it is not going to be sensible for the Government to provide the insurance. Since she needs the insurance you may want to stop the bank finding it quite so easy or so cheap to use that kind of source of funding to finance risky and speculative activities.”

Familiar with Hampshire from childhood holidays in Hedge End and visits to Southampton to watch the ships sailing in and out of the docks, he was sensitive to the port’s difficulties from the slump in global trade.

“This has been a sharper downturn in world trade in the last six months than was the case in the Great Depression,” he said. “This is a once in a century event. So, it’s not surprising that the port and the activities that are related to the port have been very badly hit. I mean world trade has collapsed. It’s fallen by 15 per cent in six months. I’ve never seen anything like that at all.

“We are beginning to see signs of stabilisation. The rapid falls of the past six months may be coming to an end. I think a sensible central view would be that we wouldn’t expect the rates of decline of the last six months to continue.”

Now he aims to steer the economy back to “a world of stability like we had before” but admits there will be a difficult transition.

“I don’t there’s any simple or quick answer to this. But we will come through this. We certainly will come through it. We will get back. Not to a world in which GDP growth is exactly 2.5 per cent forever but an ordinary business cycle. In an ordinary business cycle there will always be surprises, but people will have confidence that no matter how bad the shock, the Bank of England will respond so that gradually we will get back to stability again. And if we can get through this crisis I’m pretty sure we can get through any crisis.”