In a paper submitted to the House of Commons Treasury Committee, Mervyn King, Governor of the Bank of England warned yesterday: ‘The recent turmoil in financial markets has increased uncertainty in the world economy.’
He claimed: ‘But the source of the problems lies not in the state of the world economy, but in a mis-pricing of risk in the financial system.’
Further warning ‘the path ahead is uncertain,’ King concluded that ‘injections of liquidity in normal money market operations against high quality collateral are unlikely by themselves’ to satisfy extended banks’ current needs.
He added: ‘To do that, general injections of liquidity against a wider range of collateral would be necessary.
‘But unless they were made available at an appropriate penalty rate, they would encourage in future the very risk-taking that has led us to where we are.
‘All central banks are aware that there are circumstances in which action might be necessary to prevent a major shock to the system as a whole.
‘Balancing these considerations will pose considerable challenges, and in present circumstances judging that balance is something we do almost daily.’
He warns: ‘If risk continues to be under-priced, the next period of turmoil will be on an even bigger scale.’
Meanwhile Chancellor Alastair Darling lashed out at the banks for lending money too freely, a policy the Blair/Brown governments has encouraged for 10 years.
Darling said in an interview in yesterday’s Daily Telegraph: ‘They (borrowers) need to ask themselves, “Can I repay this?” and lenders need to ask themselves, “If it goes wrong can I get it back?”. People do need to think long and hard about this.’
Calling for caution, Darling attacked the banks for taking risks.
Yesterday prime minister Gordon Brown posed for photographs with Margaret Thatcher at the door of 10 Downing Street before taking her in for tea.