I think that what this crisis has shown is this: the conventional regulatory approach was, if an institution was ok, then you don't need to worry about it. What the last two years has shown is, it's the connections between these banks that's the problem - the interconnectivity. Northern Rock was one of the best capitalized banks in the country; it met all the requirements. But the problem was that it had a funding model that was dependent on it being able to raise money on the markets. When that stopped, it collapsed.
So I think the better way of dealing with this is to have a proper resolution procedure, a living will, so you can look at these things in advance. If the proposition was 'break up your banks,' then I would say no, I don't think that's the thing to do.
The more transparency, the more people know what it is that they're trading in, the more other people can know what they're trading in, the better it can be. Part of the problem in 2008 was that banks became so suspicious of what each other was holding that they said they wouldn't trade in them. When banks lose confidence in banks there's a real problem.
Q: A lot of this needs to be dealt with very quickly. Your counterpart in France feels that the Basel standards are adequate to deal with it. But are they quick enough?
A: The last Basel process took 10 years. And we don't have ten. We don't have two. It's rather like, if your house catches fire because of a fault in the wiring. And everybody works together to put the fire out, and pledges to mend the damage. And then it's so tempting to leave the wiring repairs for another day. And I think that would be a disaster for us: we need to get a move on.
The G20 reached agreement on a whole host of things, in London and then in Pittsburgh. I hope the seven of us this weekend can agree on the urgency of actually implementing changes, and persuading the rest of our G20 colleagues that this is a problem that has not gone away, it needs to be sorted out. And indeed our recovery in the future is dependent on us having an effective, functioning banking system, and a safer banking system. To get a safer banking system is very important.
Q: Is there any consensus on how to deal with currency and balance-of-payments imbalances, especially between China and the U.S.?
A: It has been an issue in the last ten years, but it has now become a more urgent problem.
This is why it's important that we now have a G20 process, because countries like China need to be part of it.
The last couple years have shown that you cannot rely on the U.S. consumer to drive growth over the next ten years. The last two years have shown us we were all affected by this.
If we are all going to sit around the top table we have to realize we have responsibilities as well as rights. And I think this is a problem that needs to be resolved, it needs to be resolved sensibly, and I don't think it's particularly helpful to blame one side or the other, because everyone can point to something that somebody didn't' do, but I do think we have to have a grown-up conversation about it.
It was recognized at the end of the Second World War that this is an important issue. And sixty or seventy years on, it's far more important that we engage with the same degree of vigour.
I do think that China will realize that it's in its interest to have a better equilibrium than they've got at the moment. There's no country in the world that's big enough now to pull down its shutters and say 'we'll go it alone.' You simply cannot do that. The United States cannot do that, no country can do that.