Britain’s recovery will be longer than a quick V-shape. Q&A with Mervyn King

Maggie Pagano interviews Mervyn King, the former Governor of the Bank of England whose tenure spanned the global financial crash, about the government’s response to rescue the economy and why it’s impossible to predict how and when the country will recover from the crisis.  

As Lord King points out in his timely new book with economist John Kay, trying to predict the future with mathematical modelling is a fool’s errand. Indeed, the authors argue in Radical Uncertainty: Decision-Making for an Unknowable Future, that forecasting future events with numbers is not just foolish but fraudulent, as probabilities do not exist, and probabilities are unknowable.

So what does that mean? Well, take the timing of their book. When the authorsdecided on a March publication date, they had no idea the world would be plunged into radical uncertainty by a radically uncertain event such as a pandemic.

Yet it was a knowable event. They wrote in the book: “We must expect to be hit by an epidemic of an infectious disease resulting from a virus which does not yet exist.”

Maggie Pagano: How successful has the government’s scheme been to rescue business and save jobs? 

Mervyn King : Having effectively suspended the market economy by imposing a shutdown, the government had two problems to solve: how to provide immediate cash-flow to businesses facing disaster, and how to compensate them for loss of takings. Getting cash to businesses was essential, and had to be done immediately to stop them going bust. Unfortunately, the CBILS loan scheme was not able to do that fast enough because the banks were not prepared to take on the credit risk. That’s why they were still offering companies loans on normal terms. And the scheme got bogged down in the bureaucracy.

One of the first mistakes was that banks did not have branches open, so people could not meet the bankers they already knew which might have helped getting the cash out faster.

Banks have a mind of their own: they were anticipating the losses that these companies might make, and they knew that loans might never get repaid. They also knew that these losses would mount up very quickly.

MP: The government has amended the scheme for SMEs by offering 100% guarantees up to £50K. Do you think this is enough to stop many of them going bust? 

MK: I have been concerned about the fate of SMEs, including the self-employed, since the start of government measures. The most recent decision to offer loans up to £50,000 backed by the government with 100% is a step in the right direction.

There is little for commercial banks to fear if government is giving a 100% guarantee. But the banks have been slow to deal with the logistical question of how to cope with so many queries and applications for the business interruption loan scheme.

Somebody in government still needs to get a grip on this. Politicians are used to making announcements. But they have no experience in actually running anything. I think the problem has been less the high-level design of schemes and more the need to worry about their implementation on the ground.

In a crisis like this the politicians should have appointed someone – probably from outside – to take charge, and to have that person on the phone all day and night telling the bank bosses “You’ve got to have this up and running by 9am tomorrow morning.” We needed a stronger chain of command at the top of government.

With regard to the guarantees, I don’t see the point of an arbitrary limit. The government should have gone for 100% guarantees on all loans, at least for a period of say three to six months until the economy recovered and given it for larger amounts.

The central bank was there providing commercial paper for the bigger companies.

If the government had gone for a full guarantee then I think the banks – which are always reluctant to lend to small businesses in any circumstances – would have been happier to take part in the scheme. That would make the bank the agent of the government, and would have meant getting the money out faster and saving businesses.

MP: Could the rescue plan have been improved ?

MK:  The government could have looked at other mechanisms of getting cash to businesses.  Going through the banking system was bound to prove logistically difficult. I was surprised that the government did not think of “reverse taxation” schemes under which last year’s payment of income tax and VAT could be returned to the businesses that made those payments.

MP: Are there better ways of getting new investment – equity – into smaller companies ? 

MK: The problem with encouraging equity investment into some of these struggling companies is one of confidence. It’s going to be extremely difficult for investors to make a judgement about the future of companies in current circumstances. As well as SMEs, there are also problems for sole traders. Government grants, not just loans, will be needed for the smaller limited companies and businesses because they are falling through the cracks of the scheme.

MP: How do you think the UK economy will recover? Will it bounce back quite quickly in a V shape, as some economists predict? 

MK: Suspending the market economy is a temporary state. Although the national debt is rising rapidly, we should soon be able to return to a path of some sort of recovery.  It is important that the productive capacity of the economy is not damaged by unnecessary bankruptcies. However, as John Kay and I point out in our book, it’s silly to make precise numerical forecasts at this stage. What I will say is that there is too much confidence in a quick V-shaped recovery. It will take longer.

MP:  What lessons can be learnt by the government – if not all governments – from the pandemic ?

MK: There will be many big lessons to be learnt when we get to the post-mortem. The first is that we should have been much quicker to stop flights coming into the country, and to tighten our borders to shut off the disease being brought in by travellers from overseas.

When an epidemic like this arises, social distancing is effective only if tight border controls are introduced. That’s why there will be a much sharper focus on immigration, border controls and international air travel: they will be big areas for concern in the future.

As a student visiting the US in 1971, I remember that to get your visa you had to have chest x-rays to show you didn’t have any diseases. I would not be surprised to see similar health restrictions being imposed on international travel in the future.

What has been interesting during this crisis is how quickly business has adapted, and can function without so much international air travel.

Businessmen and businesswomen who used to fly around the world every few weeks now know they don’t need to. Zoom and other means of communication have been shown to work rather well. Many people have also discovered they don’t need to do the long commute. There will be many changes in behaviour once the crisis has calmed down. There will also be questions raised about global supply chains, and whether we need to bring more industries considered essential back into the UK. No doubt there will be many changes to how we conduct business and live our lives.

MP: How can the lockdown be unlocked?

MK: It should be a trial and error process. I can’t see any other way of ending the lockdown. I don’t think we need to know all the details of the relaxation plan as events are changing all the time. It’s got to be a judgment call, but one that can be adapted to changing events.

MP: There has been much debate about how this crisis will change our perspective on so many issues from how business is run to the importance given to public services such as the NHS. What is your biggest takeaway from the crisis?

MK: Resilience. To my mind, the biggest issue raised by the crisis is Britain’s resilience and its robustness in facing such unpredictable – but not unexpected – events. We need to build in more resilience into our society. For example, once the crisis broke, hundreds of people volunteered to help work within the voluntary sector and to help out with the NHS.

Going forward, we should be looking at keeping these volunteers and bringing them into some sort of permanent voluntary service so they are ready if we have similar pandemics or other crises when we need instant help.

Why don’t we have a permanent voluntary service for the NHS? They could be retired doctors and nurses, but also others without experience, and once a year they could have extra training? It’s clear we did not have adequate facilities for certain essentials whether it was PPE or for testing and tracing.

Once again, we have seen that the banking system is essential to the running of the economy; although as I said before, it could have been made more robust. We need to learn the lessons of the financial crisis. In the same way we have toughened up the banks, we need greater resilience in our health and other critical systems.

MP: There are many who believe that the UK should delay EU negotiations over the transition agreement because of the catastrophe. As a Brexiteer, what do you think?

MK: I don’t know. There is so much else going on in the background of the EU irrespective of the virus that may be important. Let’s see what happens before deciding.

Mervyn King was Governor of the Bank of England from 2003 to 2013 and is currently Professor of Economics and Law at New York University and Emeritus Professor of Economics at the London School of Economics and Political Science.