mervyn king : address by mervyn king to trades union congress address by mr mervyn king, governor of the bank of england, to the 2010 trades union congress, manchester, 15 september 2010. * * * president and congress i want first to thank you for inviting me to address congress. members of your general council have made a huge contribution to the bank of england by serving on our board – the bank ’ s court. carrying on that tradition today is brendan barber. by bringing a distinct and important perspective to our discussions, brendan has helped us through some extremely turbulent times. i am grateful to him. recent times have indeed been turbulent. after a decade and a half of stability, with rising employment and living standards, came the crisis and recession – the biggest economic upheaval since the great depression. before the crisis, steady growth with low inflation and high employment was in our grasp. we let it slip – we, that is, in the financial sector and as policy - makers – not your members nor the many businesses and organisations around the country which employ them. and although the causes of the crisis may have been rooted in the financial sector, the consequences are affecting everyone, and will continue to do so for years to come. thankfully, the costs of the crisis have been smaller than those of the great depression. but only because we learnt from that experience. an unprecedented degree of policy stimulus, here and abroad, prevented another world slump. even so, around a million more people in britain are out of work than before the crisis. many, especially the young unemployed, have had their futures blighted. so we cannot just carry on as we are. unless we reform our economy – rebalance demand, restructure banking, and restore the sustainability of our public finances – we shall not only jeopardise recovery, but also fail the next generation. to my mind, a market economy and its disciplines offer the best way of raising living standards. but a market economy cannot survive on incentives alone. it must align those incentives to the common good. it must command support among the vast majority who do not receive the large rewards that accrue to the successful and the lucky. and it must show a sense of fairness if its efficiency is to yield fruit. there was nothing fair about the financial crisis. it was caused not by problems in the real economy ; it came out of the financial sector. but it was the real economy that suffered and the banks that were bailed out

. your members, and indeed the businesses which employ them, are entitled to be angry. but however legitimate, anger will not produce change unless its energy is harnessed to a cool analysis of what happened and why. so i want to discuss the fundamental causes of the crisis before turning to current policy. the fall of the berlin wall in 1989 changed both politics and economics. within a few years, the former soviet empire, china and other asian economies, with their combined workforce of over a billion people, entered the world trading system as market economies. their focus on export - led growth allowed consumers in the west to enjoy rising living standards as the prices of traded goods fell. but the trade surpluses in emerging economies implied an outflow of capital. relatively poor countries were lending money to richer western ones – the reverse of the traditional model of development. in the process, countries like china built up huge holdings of foreign assets – running into trillions of dollars – matched by equally huge debts in the deficit countries. such massive imbalances were never likely to be sustainable, and so it proved. if the first fundamental cause of the crisis was the scale of imbalances in the world economy, the second was the inability of our banking system to absorb such large inflows of capital without taking excessive risk. in the five years leading up to the crisis, the balance sheets of the west ’ s largest banks doubled – mainly because banks lent more to other firms within the financial sector than to the wider economy. and the proportion of capital held by banks shrank so that their leverage – the ratio of total liabilities to equity capital – rose to unprecedented levels. immediately prior to the crisis, the leverage ratios of some uk banks approached 50. to say that was risky is an understatement : at such levels, a 2 % fall in the value of a bank ’ s assets is sufficient to wipe out its capital and render it insolvent. remuneration, especially the structure of financial sector bonuses, encouraged excessive risk - taking, and distorted the aspirations and career choices of too many talented young people. investors, banks and regulators had been swept up by the apparent success of modern finance. when investors realised that many of the assets that banks held on their balance sheets were opaque and hard to value, there was immediate and justifiable concern about the solvency of many of those banks. at the end of 2008, these two fundamental factors culminated in the worst financial crisis in history. in the