Mark Carney identifies ‘three lies of finance’ that could lead to a new financial crisis

Ex-Bank of England governor Mark Carney has said that there are three lies of finance that must be resisted to avoid the next financial crisis.

Carney was giving the second in a series of Reith lectures for the BBC on 9 December, discussing the financial crisis of 2008 and asking whether bankers had changed their ways since then.

He also questioned whether the financial system as a whole is more resilient to shocks than it was when the crisis hit more than a decade ago.

‘This time, it’s different’

“The first lie is the four most expensive words in the English language: This time, it’s different,” Carney said. “This misconception is usually the product of an initial success, with early progress gradually building into blind faith in a new era of effortless prosperity.”

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Carney cited the rapid expansion of credit before the last crisis as an example of wishful thinking by regulators, governments and financial institutions.

“Complacency amongst individuals and institutions, complacency fed by a long period of macroeconomic stability and rising asset prices made this remorseless borrowing seem sensible,” he said. “Captured by the myth that finance can regulate and correct itself spontaneously, authorities retreated from their regulatory and supervisory responsibilities.”

‘The market is always right’

“This has two dangerous consequences. First, if markets are efficient we can identify bubbles or address their potential causes. Second, if markets always clear, they should possess a natural stability and evidence to the contrary must be the product either of market distortion or incomplete markets,” Carney said.

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‘Markets are moral’

The third lie, that markets are moral, takes for granted the social capital that markets need to fulfil their promise, Carney said.

“In financial markets, means and ends can be conflated all too easily, value can become abstract and relative and the pull of the crowd can overwhelm the integrity of the individual,” he said.

Carney referenced scandals such as Libor and foreign-exchange rigging and the widespread mis-selling of financial products to customers that emerged following the last crisis.

Anti-fragile

“To resist the siren calls of the three lies, policymakers and market participants must bind themselves to the mast, and that ultimately means recognising the limits of markets and rediscovering our responsibility for the system,” Carney said.

“If the experience of the financial and Covid crises teaches us anything, it’s humility; we cannot anticipate every risk or plan for every contingency, but we can and must plan for failure,” he said.

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For the former governor, that means creating an anti-fragile system.

“A system that can withstand both the risks we see and those we don’t,” the Canadian added. “An anti-fragile system requires banks that can stand on their own which is why banks are now required to hold ten times as much capital as they did before the crisis.

“We need to promote the values of responsibility, solidarity, integrity and prudence as best we can, through pay, through codes and through regulations, while recognising these can only be fully lived through culture and practice,” Carney said.

“So while authorities must continue to put in place the infrastructure to make markets work, there is no simple unifying formula to break the destructive cycle of financial history,” he concluded. “Physics won’t save finance; promoting a system in which all its participants live core values, will.”

Darling and Morrissey

Former chancellor Alistair Darling, also speaking on the programme, said: “Mark’s dead right, the problem will arise when a new generation comes along, when the last person who was around 10 years ago disappears, and the collective memory is lost.”

Asked about how close the global financial system came to the brink in 2008-09, Darling said: “We were actually about three hours away from it. I vividly remember the call I got from the then chairman of RBS — then the biggest bank in the world — in size it was bigger than the UK economy — and there was a massive run on the bank.

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“He rang me up and said they were hemorrhaging funds and what was I going to do about it? We had a plan and we were ready to go and I said ‘how long can you last?’ and he said ‘well, we are going to run out of money this afternoon’.

“If you think about it, if the bank had gone down, cash machines had gone down, people couldn’t get their cash, Northern Rock would have looked like a quiet sunny afternoon. It would have been absolutely disastrous, not just for the UK but the system right across the world, that’s how close we came.”

To contact the author of this story with feedback or news, email James Booth

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