Former Bank of England Deputy Governor John Gieve said the central bank was too slow coming to grips with the financial crisis that began five years ago today.
The Bank of England grasped later than other central banks that “extraordinary measures across the board were going to be necessary,” Gieve told BBC Radio 4’s “Today” program. “Looking back, we were a bit slow off the mark” in providing liquidity to banks. “That would have eased matters at that stage. We could have recapitalized our banks earlier than we did and maybe that would have made us a bit more resilient.”
BNP Paribas SA marked the start of the worst financial crisis since the Great Depression by halting withdrawals from three investment funds that owned subprime mortgage securities. A month later, Britain suffered its first bank run since 1866 when queues formed outside branches of Northern Rock Plc.
The government eventually seized control of the stricken mortgage lender and lawmakers criticized regulators for not doing enough to prevent the crisis. Gieve defended himself at the time by saying: “I do not think I was asleep at the wheel.”
In Britain, the crisis culminated in the 65 billion-pound ($102 billion) taxpayer-funded bailout of Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc following the 2008 collapse of Lehman Brothers Holdings Inc. in the U.S.
The credit crunch plunged Britain into its worst recession since World War II and the economy is still struggling to recover. In its quarterly outlook, the Bank of England yesterday cut its growth forecasts to show the economy at a standstill this year.
“Zero growth for effectively two years is very disappointing,” Gieve said. “The economy is stagnating, still at very high levels of income, which is why it doesn’t feel for many of us, for those of us in work, quite such a devastating recession as in the 1980s and 1990s.”
The “real root of stagnation is a reassessment by the household sector of what they can afford,” he said. “Expectations of increasing prosperity had become ingrained and people borrowed on the basis of that.
‘‘We’re seeing a major change of expectation of future incomes and as a result consumption has not recovered after the recession as it had in previous episodes,’’ he said.
Gieve said the government and the Bank of England should step up efforts to spur the economy by spending more on infrastructure and encouraging banks to lend.