Lord Mervyn King:

MALE SPEAKER: Please join me in a massive round of applause to welcoming Lord Mervyn King [APPLAUSE] MERVYN KING: Well, thank you very much

I'm delighted to be here I should apologize right at the outset for wearing a tie Google is actually a lot more tolerant in this respect than some other places, because I remember going, when I was at the bank, with some colleagues to the Palo Alto area, and Hal Varian, your chief economist who's an old friend, showed us around Mountain View And it was a very civilized visit We enjoyed it enormously

And then we went off to Facebook And as we got to Facebook, we were greeted by a young woman straight out of college who had this missionary zeal on her face And we're about four of us And we're all wearing suits and ties– from the Bank of England, of course And as we walked in to go up a staircase, she pointed to a picture, because they spent vast amounts of money in Facebook doing up an old warehouse to make it look like an old warehouse

And there was a poster on the wall with a man in, you know, gray hair and a suit and tie And she pointed at this man and said, that's the enemy So I'm forever grateful to Google for being more receptive to people who wear ties MALE SPEAKER: Well, welcome We love ties

I'm wearing a TMLewin shirt, which also puts me slightly out of that MERVYN KING: Very impressive MALE SPEAKER: So what do you see as the difference between engineering and economics? We're in an engineering building

There's many engineers in the room here And you were saying economics perhaps started out as a scientific engineering subject MERVYN KING: Well after the Second World War, it did I think that what was very striking in the early 1960s was that there was an influx of mathematicians and natural scientists into economics And people wrote highly mathematical treatises and the old idea of the invisible hand, Adam Smith, Paul Samuelson wrote his textbook

Highly mathematical And economists got more and more excited about the fact that they could be like scientists, and we could make accurate predictions And I remember in the '60s, as a student, that people were constructing computer models of the economy and applying control engineering techniques to it to optimize the part of the economy So you'd choose interest rates and fiscal policy to optimize that part of the economy And this was a tremendous, exciting development

And it all failed Completely failed And the reason is that there's a fundamental importance– and I don't think it's fully been grasped since– that there are no natural constants in economics There are no laws that you can believe hold exactly And one of the things that's crucially important in understanding the behavior of the economy are people's beliefs about what will happen in the future

Expectations And sometimes, these can be pinned down by what look like sensible or plausible views of the world But other times, the future is so inherently unknowable that there's no rational basis on which to form expectations about the future And so in the book, what I talk about is that people don't optimize, they cope And that is the big difference, I think, between engineering and physics, where you can genuinely believe that there are laws of nature determining paths– you may not know what they all are, and you try and discover more about it, but once you've discovered them, they're paths– and economics, where there are no fixed scientific, immutable laws like that

And I think economists are deeply reluctant to admit this, because it would pull them back into the pack of all the other social sciences MALE SPEAKER: Sure MERVYN KING: And it was always very thrilling to be thought of on the same level as engineers and scientists When you realize actually you're not, it becomes a bit of a shock MALE SPEAKER: OK

So the book is called "The End of Alchemy: Money, Banking, and the Future of the Global Economy" What do you mean when you say alchemy? MERVYN KING: Well the traditional meaning of the word alchemy is to turn base metal into gold Change something that, in reality, isn't very valuable into something that is That's clearly been true of money down the generations Paper money, electronic money, there's no inherent value to it

It depends on trust People's willingness to accept it, and the trust of the people issuing it But it's even more true of banks, because you put your money in a bank that has a deposit, the bank tells you you can take it out whenever you want to, to make a payment or to have cash Actually if we all did that, they wouldn't be able to meet the demand, because they've used the deposits to finance highly illiquid loans So there is something– it's a sort of alchemy to believe that all of us have deposits in banks which are highly liquid and we can use them whenever we want

And yet at the same time, they're backed by something that cannot possibly meet that demand That's what I mean by alchemy MALE SPEAKER: OK And by illiquid, just in case anyone isn't clear, illiquid means? MERVYN KING: So the bank would make a loan to a household or a company where they would say well, I will lend to you for 10 years for a mortgage or for an investment And there's no way the bank can get the money back until that period

MALE SPEAKER: Yeah MERVYN KING: So if someone walked into the bank and says, terribly sorry, I'd like all my money out, the bank can't then turn around to the people it's lent to and say, well, I know I said I'll lend to you for 10 years Actually, the people that I got the money from have now come in and asked their money back So could you please repay your loan tomorrow And even if they did try to ask people to repay it tomorrow, they wouldn't be able to do so, and people might have to sell the assets that they'd bought with the loan

And that would be at a– MALE SPEAKER: A lower value MERVYN KING: A lower value, at a fire sale price So that is the ultimate alchemy, that the banking system pretends to people that all the money that they put in a bank is highly liquid, that is you can take it out whenever you want and use it, whereas in fact it's backed by investments that are far from liquid MALE SPEAKER: OK So the 2008 crisis is a large part of the book

How did it come about, and how is that related to the alchemy on which the book is based? MERVYN KING: So the book is not a memoir It's not a blow-by-blow account We've got dozens of those already And I didn't want to do that because, inevitably, that's self-serving If I wrote a book about the events that happened, it would be from my perspective, and most of you would be sensible to say, well, he would say that, wouldn't he? So I wanted to write something about the ideas behind this, because it seemed to me that the first observation I had when I left the bank and reflected on everything was almost everyone in this drama was in a prisoner's dilemma

That is, that there was nothing that they could do on their own to get out of this But the classic demonstration of this was Chuck Prince, who ran Citibank, who said in 2007, this famous statement he made, while the music's playing, we've got to go on dancing, so we're dancing And within two or three months, the music had stopped and he lost his job But the interesting point about this was if he'd said that five years earlier and said, you know, I am very nervous about all these complex financial instruments that people are selling and we don't want to do this anymore, we're gonna get out of this market, we're not gonna be so highly leveraged– that is, the bank was financing itself by too much borrowing, rather than equity finance– if he'd said that, then Citibank would have been much less profitable in the intervening five years, and he would probably have been sacked before we even got to 2007 MALE SPEAKER: Because the shareholder expectation wouldn't be met

MERVYN KING: All the other banks would have been earning a lot of money, because they were taking risks So Keynes once said, John Maynard Keynes once said, that it doesn't matter what risks you take as a bank, provided all the other banks are taking the same risks And there was a similar problem for central banks, because there was this downward movement of interest rates, which started really after the fall of the Berlin Wall when, you know, communism was said to have lost out to capitalism Now we saw all this And in fact, at the same time, what we saw with China and other countries embracing a market economy was that the number of people working in the manufacturing sector around the world who wanted to export their production probably trebled

And that was partly responsible for keeping wages of most people at low levels, or at least no increases in wages But it also meant that these countries that wanted to export a lot were saving a vast amount They were saving far more than we were willing to spend And so they were putting this money into the capital market around the world It was a global capital market for the first time

And interest rates determined by the balance between saving and investment kept pushing rates down And that meant that countries like the UK and the US were facing trade deficits, for different reasons China, other countries in Asia, on the one hand, and Germany on the other, wanted trade surpluses That meant that they were saving more than they were investing We were on the other side of that, with a trade deficit, we were borrowing more than we were– we had to borrow from the rest of the world to finance the trade deficit

And our debts were spiraling upwards And everyone thought that we could go on doing this But in the end, we couldn't And that's really what brought about the crisis in itself So the symptom of the crisis was that the banking system through which these flows of savings and investment were mediated, the banking system itself had borrowed a lot of money, taken in more deposits, and became very fragile

So there were many banks that had what are called leverage ratios That is, how much has the bank itself borrowed from other people rather than financed through its own shareholders That was 50 to 1, which meant that if you had a bank with, say, $100 million of assets, you only had to have a fall in the value of those assets on average by 2% to mean the bank was literally bust, insolvent MALE SPEAKER: So with that 50 to 1 ratio, would the healthy amount be 1 to 1? Is that the ideal? MERVYN KING: I don't think we know what the ideal ratio is And this is where expectations come back, why this isn't an engineering phenomenon

So ask yourself the question, how much money does a bank need to finance itself through equity in order to persuade other people that it's safe to lend to the bank, and they can attract funds and do their business Before the crisis, we know the answer to that, which is hardly any Because banks were able to get lots of money from elsewhere with very little equity Immediately after the crisis, the answer to that same question was a hell of a lot, because people suddenly thought, God, banks aren't safe anymore And the innocence of the banking system was lost

And the regulators really played no part in any of this This swing in sentiment from being wildly optimistic about what banks could do to being extremely pessimistic was a change in sentiment You couldn't claim that it was obviously irrational in any way People were trying to cope with an unknowable future They made this judgment

And that is the danger with the banking system, where if people can't get their money out and know that maybe if the bank is fragile they can't get their money out, then they may be tempted to run And what happened in New York in September, October 2008, it wasn't that ordinary people, ordinary depositors queued up outside the bank to get their money out It was wholesale depositors That is, financial institutions Money market funds

Hedge funds All said to themselves, these banks aren't as safe as we thought, we get our money out as soon as we can And that was the run on the banking system that reached its peak in New York in that period MALE SPEAKER: So you mentioned the normal day-to-day depositors, the you and I Do you think that the public's anger is justified at bankers, and the banking industry in general? MERVYN KING: Well, I don't think we should go into this with blaming people

I think ordinary people are right to be angry But the reason they're right to be angry is because of a collective failure of thinking and ideas, rather than the behavior of any one individual So Dick Fuld in Lehman Brothers or Fred Goodwin here in the Royal Bank of Scotland did not cause the financial crisis It was much deeper forces than that The difference between what happened in 2008 and the early 1930s in the Great Depression is that central banks and governments in the latter instance, in 2008, expanded demand, cut interest rates, to prevent a big rise in unemployment

And that worked However, that kind of policy stimulus is a bit like a painkiller It conceals the initial pain It brings relief But it doesn't deal with the underlying symptoms

And if all you do is to give a patient painkillers, they don't get better And in fact, it's quite dangerous to go on doing it too long without tackling the underlying symptoms And I think that what people started to see was, well, yes, we didn't see a massive rise in unemployment We did see a considerable rise, but it was muted compared with the 1930s But we don't see a recovery

We haven't got back to where we should have been In fact, I would reckon that total national income is about 15% below where it would have been had we not had the crisis That's a staggeringly large number And that's an enormous cost of this crisis And therefore, there are two conclusions from that, in my view

One is that this shows the potential for rapid growth in the future, if we do tackle the underlying symptoms And secondly, it shows why it is that people are indeed angry, because their living standards have not grown as they should have done and would have done And I think it's been compounded by the fact that, certainly in the US and the UK, that people were taught that a market economy is good for you That it can be unpleasant at times, you know, if your business isn't doing very well and people don't want to buy what you're producing, the government won't bail you out If you're an employee in a company, you might have to accept a wage cut rather than go on strike in order to protect your wages

And that's a healthy response to enable a company to keep employing more people So embracing the discipline of a market economy was what everyone was told was good for them, and would boost productivity And the people who were telling this to ordinary people most loudly were those who worked in the financial sector Well, blow me When it comes to the financial sector and the banks getting into trouble, where was the market? Where was the discipline of the market economy? We all bailed them out

Now, there were reasons for that, which was to protect the economy from the banks We didn't want to see a collapse of the payment system But you can understand why someone who hasn't read a lot of financial history or got a degree in economics would say, well, this is deeply unfair, and to feel very angry about it And I used to have dinners at the bank in the immediate aftermath of the crisis And I've asked people, I'd say, why aren't people more angry? This has got to grow as time has gone by

And I think that is true, it is growing And the failure of governments around the world to deal with it is the reason why there is support for extreme political parties on both sides, both left and right Doesn't matter whether you vote left or right, as long as you don't vote for these guys in the middle who, when one goes out of power and the other one comes in, same policy No change This unhappiness with what's going on I think is very serious

And it's not going to go away quickly MALE SPEAKER: And then towards the end of the book, you talk about ways that you think we can restore faith in the system So what do you think, in your opinion, the kind of the way forward is to make this system stronger and more reliable? MERVYN KING: I think there are two sets of things One on the banking side, which, you know, in the short run, we've certainly made the banking system, at least in Britain and the United States, safer It's not as safe as it needs to be, in my view, but it's safer than it was

And I would think, that, over 10 to 20 years, if we really buckle down to it, we could eliminate the alchemy of the system And I suggest that we turn central banks into what I call the pawnbroker for all seasons In other words, instead of waiting until a crisis and then throwing money at the banking system, what we do is to say, if there's a crisis, we will lend you money, and you have to be in a position that you can borrow from us enough to pay off all the depositors That will end the alchemy But in order to do that, you've got to bring to us well before a crisis, in normal times, your assets, like someone would take a gold watch to a pawnbroker

They take the assets on their balance sheet to the central bank, and the central bank says, hm, well, you say these assets are worth $100 million We are prepared, in the future, to lend you $75 million on these assets And the banks have to pre-position, they have to bring collateral to the central bank, sufficient assets that they will have enough guaranteed credit line with the bank that they will always be in a position that they can pay off the depositors Then everyone would know that there's no point in starting a bank run, because the bank would always be able to go to the central bank and raise the money to pay you off So if some people run, that's their right, but there's no reason to follow them

MALE SPEAKER: Yeah MERVYN KING: Whereas in the current banking system, if you see people queuing outside a bank, the rational thing is to get in the queue MALE SPEAKER: Because if you're last in the queue, you may not get your money MERVYN KING: Absolutely MALE SPEAKER: OK

MERVYN KING: That's the first thing, I think Make the banking system safer The other is what do we do about the world recovery And I think that this is much harder It's not obvious to me that any one country can get out of this on its own

This is the prisoner's dilemma But I do think it's two or three things that go together One is that fixed exchange rates, locking exchange rates, has not served us well And that's true with China fixing exchange rate to the US dollar, as well as many other Asian economies And it hasn't worked well within the monetary union in Europe

And I'll give you one simple example If you take Finland, a country in the monetary union, it's obeyed every fiscal rule you could think of No one criticized Finland for not being prudent and tough on the fiscal rules Then it had a big shock, Nokia Nokia was about half the Finnish stock market

It went down massively in value, Russia in deep economic trouble Those two things administered a major economic shock to Finland In the past, well, all right, these things happen It's very unfortunate But there was a shock absorber, namely the exchange rate

And the Finnish exchange rate would have fallen to enable Finland to export more and to import less And that would have been a shock absorber to keep the economy going There's no shock absorber now They can't change the exchange rate against any of its major trading partners And so what you see is that output is declining in Finland

Unemployment is rising It has a major problem, and no instrument to be able to deal with it So I think making exchange rates more flexible is very important I think we will also need to face up to the fact that people discovered in the crisis that, in some countries, certainly here and in the US, we'd all been spending more than we now realize we should have been spending given the prospects for the future We don't want to have spent everything out of our lifetime incomes too early

And it's very expensive now to put money aside for a pension But, you know, we need our pensions when we get there And so people are being very cautious now about how much they spend I think the only way to deal with that is to embark on a massive program of raising productivity This will require a lot of small measures different from one country to another

It will take many years But as long as people believe that there is a coherent and credible plan to boost productivity in the future, then they'll think, well, I'm gonna be better off in the future than I think today, and that means I'll have more confidence to be willing to spend today I won't run down debt as quickly as I might otherwise have done And the third thing, I think, is that the experience of the post-war period is that trade between countries is fundamentally important to boosting productivity We learn from each other, we get ideas, innovations transmitted through trade

You can see in your field that the flow of people and ideas is crucial, and trade in services as well as goods is a crucial part of that So those are the things I think we will need to embark on And then finally, I do think that there is a lack of effective cooperation amongst countries in the world And if no one country can get out of this on its own, we will need greater cooperation And I went to all these international meetings

My god, they were awful And they cost a lot of money to put on And you know, as I say in the book, talking shops are good, but only if the talk is good And it wasn't MALE SPEAKER: We're gonna open up to questions in a moment, so get some questions in your mind

One question for me In those heady days of 2008, the late nights, all the kind of takeaway pizzas I imagine, what was the most surreal moment that you went, I can't believe that we're facing this MERVYN KING: Well actually, we didn't have any takeaway pizzas We just had glasses of water, I think was about the only thing There were dramatic moments, such as when the Royal Bank of Scotland rang up and said, you know we said last week that we were finding it difficult to borrow money except overnight

Well actually, we can't borrow overnight tonight, so unless you give us some money, we'll have to close the doors And so I did something which I never thought I would do, but effectively write out a check for 60 million pounds And the only benefit of this is that when I've met professional sports people subsequently, especially footballers, because normally they're not very interested in economics, and if you've got to get their attention somehow, you just ask them what's the biggest check they ever wrote out And it is surprisingly high, I must say It's actually surprising

But then you trump it with 60 billion– MALE SPEAKER: Nice Nice MERVYN KING: –which they have trouble understanding The most extraordinary moment I think– and it was a bit surreal– was after a meeting in Downing Street where I was with the prime minister and the chancellor, and I went there with my private secretary And people watching the crisis on TV found the whole thing rather dramatic, but actually it wasn't quite so dramatic in real life when you were doing it all the time

It was grind Anyway, after the meeting, we were coming out of the front door of number 10 to get into the car And you may have seen television pictures of people coming out of the front door on number 10 Downing Street What you don't realize probably is that anyone coming out of that door cannot see a thing because they are blinded by the lights of the television cameras and the flashing of the bulbs of the print photographers Anyway, I knew this

So I got my private secretary, I said, check that the car's outside He said, it's outside So I said to the man who stands inside the front door in number 10 Downing Street, the waiter there, I said, you can open the door now So he opened the door, went out, you know, lights flashing, the bulbs, couldn't see a thing But I could vaguely see the car was there

So I got in the car My private secretary went around the other side, got in the back on the other side There was then quite a long pause before I said, very calmly, this isn't our car [LAUGHTER] There was another long pause before we both got out at the same moment, walked across Downing Street to where our car actually was, and under the gaze of– well, it was no more than three million viewers And ITN News ran the headline that evening, governor loses his way

There are a number of moments like that MALE SPEAKER: Do you know whose car it was? MERVYN KING: It actually seemed to belong to the [INAUDIBLE] MALE SPEAKER: Lovely So any questions from the audience? Mikes are coming round AUDIENCE: Can I start? MERVYN KING: Why not

AUDIENCE: So "The Guardian" today has a story about the fact that intergenerational transfers seem to be broken, so that younger people, Generation Y, are making a lot less money than they should Is that related to 2008, is that important, and can we fix that? MERVYN KING: It's related both to the causes of 2008, and also what people have done since to try and deal with it So to my mind, what happened to the banking system was a symptom of a deeper underlying problem The cause is, in a way– and I talk in the book about when the Berlin Wall fell, you know, somebody wrote a book, Francis Fukuyama wrote "The End of History" Capitalism had triumphed over socialism and communism

And the irony of this is actually it was the beginning of a process that led to the biggest crisis of capitalism since the 1930s Why was that? Because what was happening in the world economy, with the attempt to run massive export surpluses in China and elsewhere, was that long-term interest rates were just being pushed down and down and down as more savings were being pushed into the capital market And you know, the world economy needs positive interest rates, partly to give an incentive to save for the future, partly to discriminate between profitable and unprofitable investment projects And a lot of investments were made that turned out to be very unprofitable These have yet to be written off

So that will be a problem in the future So what happens if interest rates keep falling? Well the prices of assets, assets are simply the present discounted value of a future stream of earnings So even if you don't change your view about the future stream of earnings of shares or government bonds or the value of the housing services you get from a house, merely the fact that the discount rate keeps going down over a long period pushes up the asset prices So it was no surprise that house prices and stock prices, prices of art and wine, kept going up However, that does create a serious potential problem, in that the housing stock is always being sold

Year by year, the older generation, people like me, sell their houses to the younger generation, people like you And in normal circumstances, that's fine The trouble is, if you've just gone through a period when house prices have gone up a lot, what happens is that the younger generation has to borrow much more money in order to finance the house purchase Now at one level, that's fine, provided interest rates always stay low And then people like me sell their houses for much more than you ever dreamt of paying for it

So you know, I remember being astonished at the mortgages that were being taken out by my younger colleagues, people who worked for me in the bank And the biggest mortgage I ever had in my life, and that was only for a short period, was 50,000 pounds Many of you may, I fear, have mortgages much bigger than that MALE SPEAKER: Yeah Yeah

MERVYN KING: I never ever believed I would be able to afford a mortgage as high as that I would have been horrified by it But with interest rates so low, people can service the mortgage But the intergenerational implication of this is that old people like me, when we sell houses, end up with a lot of financial assets Younger people, like you, who buy houses end up with a lot of debt

Now, the household sector as a whole sort of washes out So if you're fortunate enough to be in a family where the parents say, you know, tremendous, I've just earned all this money on selling the house to your friends, so I'll give some of you back, so you don't have to borrow quite so much to buy the house Then that's fine But obviously, it doesn't work like that all the way And the real concern of the younger generation, I think, is twofold

And I mean, I've always said I belong to the luckiest generation of all That is, born in 1948, I was young enough not to have to fight in the Second World War, as my father did, and young enough not even to do national service But I was old enough not to have to pay a penny for my education When I was an undergraduate at university, there were no loans I even got paid a maintenance grant to pay for my housing and drinks in the evening and so on

Very generous of my parents' generation to pay for that Obviously, that's all gone And I was also very fortunate to have bought a house at a time when I thought gosh, house prices have gone up quite a bit, so I'd better buy a house, but way before the big house price rises that happened afterwards And the younger generation are stuck with paying for education, borrowing to finance that, and borrowing a vast amount to buy a very tiny apartment or house Now, in the long run, this will work out

But the big threat, I think, to the younger generation now– and this is why I think concerns are really justified– let's suppose interest rates start to rise Not now, but in 15, 20 years, just before you start to sell your house Well, house prices could come right back down again And the younger generation will have been bought at the peak, and have to sell them at the trough And the other problem, of course, which is a really serious issue now, is that the pension scheme which is offered to younger people is so much less attractive than the one that I was offered

Why? Because the interest rate which can be earned on the savings that go in to provide the pension, whether it be your savings directly as a defined contribution pension scheme, or whether it be the savings which your employer puts to one side through a defined benefit scheme, the return on those schemes are very low And the obverse of high rates putting up asset prices is that, as interest rates fall to where they are now, close to zero, the cost of providing a pension in the future is much higher There is no incentive to save And these are very big problems, which is why I think it's very important that we get back to a normal level of interest rates sooner rather than later MALE SPEAKER: So we have about 10 minutes left, so let's take three or four sort of short-ish questions

Graham, yeah, if you pick someone AUDIENCE: Hi I actually have two questions [INAUDIBLE] So my question is that, I'm sure you know, regulators have made a lot of new regulations now So for example, [INAUDIBLE]

But how do we know that the regulation is working? I mean, like unless there is a more data-driven approach to the stuff, like, how do the regulators know that their regulation is working? For example, you know, how do we know that the leverage ratios that the banks have now are actually the right level? MERVYN KING: OK, so let me answer that very quickly We don't, and we can't And we can't And there's quite a section in the book that explains why very complicated risk weights to calculate the requirements for equity capital by banks are, in my– I mean, let me exaggerate, but almost not worth the paper they're written on Why? Because they're based on looking at past data, which do not represent an engineering or scientific law, but they happen to represent a particular set of correlations over a period

And when a crisis occurs, it's because something totally unexpected happens, which economists don't anticipate And when that happens, the calculations of correlations and covariances that go into the official regulatory measures are irrelevant They don't work in a crisis That's why I want something very, very simple And having enough pure equity finance is guaranteed to absorb losses

And you'd need a lot more of that, in my view, in the long run, than banks have today AUDIENCE: And [INAUDIBLE] second question MERVYN KING: We've got some others, I think we have– MALE SPEAKER: Let's take this person over here MERVYN KING: Come back at it later if we have a chance AUDIENCE: So I guess you probably don't want to comment on the [INAUDIBLE] directly

But in 2008, we were in the unusual position of being in the EU but not in the euro And so that gave you some freedoms in terms of strengths Can you comment on how much difference did it make to you, being in that position? MERVYN KING: Yes, I can certainly do that And indeed, there are quite a lot of countries in the European Union that are not in the euro And I think that will continue

And one of the problems that the EU needs to face up to is the fact that it needs to recognize much more explicitly than it's done so far that there are indeed two types of member, those in the euro, and those not The real benefit to us in not being in the euro goes back to what I said about Finland earlier In 2009, Sterling fell quite sharply, by around 25% And that did enable us to see a benefit by having higher exports and lower imports than we would otherwise have done The trade position did improve

That was not enough to generate a satisfactory recovery, because the euro area was growing very weakly, and that's our biggest trading partner So I do think that having that exchange rate flexibility is important, and I think it's important that other countries get back to that, as well That was when the world economy worked, in my view, more efficiently MALE SPEAKER: Yeah AUDIENCE: Thanks very much for your talk

To your point before about how economics lacks fixed laws in the way of science and engineering, myself and my friends worry about all our hard-earned savings, putting it down as a house deposit and for there to be a recession or a crash, and house prices to fall literally overnight So would you say just kind of don't worry about that and go for it because, essentially, you have to, or are there any kind of, like, tips or advice that you have, given what's happened in recent years in terms of investing and buying property? MALE SPEAKER: How can we all get rich? AUDIENCE: Or just not really poor MERVYN KING: Yes I think that's a better question And I think there are no simple ways of becoming rich

And I'm always struck by you go into an airport bookstore and you see some book by a famous industrialist, you know, my advice on how to succeed in life No one ever writes a book saying boy, was I lucky And in fact, there's an awful lot of that in the outcomes that determine relative rewards I'd probably be arrested if I tried to give investment advice without having a qualification to do so from the regulator But I think there are no simple rules

There's no mechanical way of guaranteeing returns And certainly, if anyone says to you, I really know a great investment, just be deeply, deeply skeptical I would suggest that it is very important to put money aside for a pension And I think that, if you are sensible and careful, and find a property that you think you'll be able to afford over 20, 30 years, then that is a good investment The key thing is to avoid– if you're going to move frequently, then rent, don't buy, because the cost of buying and selling is so horrendously high

But I have no simple advice, and I can't claim to be an investment expert But you know, don't be too greedy, and don't let other people manage your money for you So what I find quite astonishing is that there are big institutional investors, like pension funds, who have decided to put money into a hedge fund that, at least until recently, would typically say yeah, we've got these very smart, clever people, and we can make more money than you'll ever be able to work out how to make And all you have to do is to pay off fees, and our fees are 2% of the capital value each year That's 20% of the profit

Now, if you think about some investment earning 5% a year, and you have to pay two of those five percentage points in fees, plus another fifth, another one in the profits, so that's– at least five percentage points return on the asset, three goes into fees And the interesting thing about that is, if you just think about the law of compound interest, that instead of growing at 5% a year, your investment's growing at 2% a year You've only got to be in this fund for 5, 10 years And most of the money that's been earned has gone to the fund managers and not to you, even though it's your money that's financing the investment So I'd be very, very cautious about investing your money when other people are making the decisions

MALE SPEAKER: Particularly when they don't have any skin in the game, which seems to be one of the, like, their money's not at risk MERVYN KING: So the person who obviously has the best investment record over a long period is Warren Buffett Now actually, it hasn't been very good in the last couple of years And he's very old now He's worrying about who to hand it onto

But over 40, 50 years, what he did was to say, if you buy shares in my, you know, management fund, I don't charge fees or anything You become shareholders with me And I own some of the shares in my company, Berkshire Hathaway And he bought lots of other companies And he had the basic, sensible rule of thumb

He only ever bought things he understood, and where he could judge whether someone was a good manager So never invest in something you don't understand, and never invest in something where other people are charging you fees for managing your money MALE SPEAKER: Great Let's take a question from over here AUDIENCE: So if the UK does vote to leave the EU, what will be the impact to the [INAUDIBLE]? MERVYN KING: Well, that comes awfully close to, you know, asking me what my view would be

And I don't want to do that I did it in an interview with BBC earlier today I had a very interesting experience in the village I live in Sometimes people come up and say, you know, what do you think of this new man of the Bank of England, and what you think about interest rates? But when it comes to the question of Brexit, they do not say to me, so how do you think we should vote? What they say is– because they do not want to be told or even advised by former governor of the Bank of England, or for that matter anybody else, which way to vote What they do want is, what are the arguments, what are the facts

They want facts and arguments to enable them to make up their own minds This is a very important national question People should make up their own minds And what is so awful about this campaign is that people are treating it as a kind of PR campaign where you look in the newspaper and some list, whether it's industrialists or financiers, it will be footballers and film stars soon, you know, which side are they on And I think this is completely valueless

And what I want is to have– and I said this in the interview– the BBC has a big responsibility here to set out all the arguments and all the facts We've got four months before we have to make up our minds There's no rush on this So that people can go away, think it through, and decide and then cast their vote Because if we don't do it that way, my worry is that it could be rather like the Scottish referendum, in which the referendum didn't actually settle anything

I don't think this referendum took the issue off the table It's still there And that's in part because it was fought as a PR campaign, with both sides exaggerating You know, whichever side you're on, it ought to be possible, in my judgment, given the issues at stake here, for people to say, well, yes, you've got a good point there, I see that, and that's why you want to stay in But here's another argument that really matters to me

And that's why, in the end, I'm going to vote to leave And the other person can say, well, you know, I accept There is an argument for leaving But actually, this argument is more important to me So I'm going to vote to stay in

That is the basis on which the debate should be carried out The idea that it's blindingly obvious what the answer is– the only problem is that half of the people think it's blindingly obvious we should stay in and the other half it's blindingly obvious we should leave This is treating people as idiots And actually, we have a jury system to try people in court Why? Not because these people are technical experts, but because ordinary people have a pretty good ability to judge when someone's telling the truth

And what I do think is that a referendum is only sensible if people are given the chance to make up their own mind Otherwise, there'll be a call for the same referendum all over again in a year or two, when some other development takes place So that's all I'm going to say MALE SPEAKER: Lovely We will leave it there, in the essence of time

Oh, we've got one very quick question One very quick question Maybe something lighthearted? AUDIENCE: It's not super lighthearted, but I'll make it a little bit different So you spoke about the value of floating exchange rates to act as a shock absorber in various economies Why do you think it is that the US dollar works, or does it work, for such a diverse country, you know, over 300 million people living there, very different industries across the states

Why does that union work? MERVYN KING: Well, very briefly, it's partly because people move all around the United States If one part of the US economy suffers because it can't change its exchange rate, then what you need to do is some people have to emigrate and leave, and people don't worry too much about that And because through one mechanism or another, whether it's social security or the tax system, the richer parts, the more successful parts of the US, will actually transfer resources to the poorer parts But even within the United States, there are parts which are clearly economically unsuccessful, deprived almost, and bits which are very successful The fundamental thing is that no one in the US says look, I'm not American

I don't come from New York, and I resent these people, you know, failing to pay me money or telling me how to run our taxes and spending here People feel American And one of the chapters of the book talks about the link between money and nation And over a very long period, there has been a remarkable one to one correspondence between nations and their monies And I think that is not an accident

It's because if you live in one nation and feel part of it, you're willing to accept the decision of a majority, that the outcome is one that you will accept, and you won't rise up in rebellion against it And that's of fundamental importance And that's true within a country, and it's not true between countries MALE SPEAKER: Great Please join me in a massive round of applause in thanking Lord Mervyn King

[APPLAUSE]