Lord Mervyn King: We need an exit strategy from the restrictions on the economy

Former Bank of England Governor, Lord Mervyn King, joins Yahoo Finance’s Alexis Christoforous, Brian Sozzi and Emily McCormick to discuss the impact the coronavirus has had on the global economy.

Video Transcript

ALEXIS CHRISTOFOROUS: We know that central banks around the world have taken some pretty bold and unprecedented steps to keep the flow of capital in our world market. Joining us now to talk more about that is Mervyn King. He is former Bank of England Governor. He's also a member of UK's House of Lords and a professor of economics and law at NYU. Mervyn, thanks so much for being with us. We appreciate your time today.

You led the Bank of England during the 2008 financial crisis. How is the crisis we are living through right now different, similar to what happened back then?

MERVYN KING: Well, there are obviously many differences. That was a financial crisis. This is a health crisis, but there's one very common feature in both, which is what I call radical uncertainty. It's the topic of the book which I've just published with John Kay.

Now before the financial crisis, we knew that there were things called financial crises. We'd had many banking crises in the past, but that didn't enable us to predict precisely when or where such a crisis would occur. And we knew that pandemics were possible. Indeed, in the book I've just mentioned John Kay and I said that we should expect to see a serious epidemic of a disease stemming from a virus that didn't yet exist, and that's now come about. But we couldn't have predicted and we didn't predict exactly when it would happen.

And I think the important lesson from all this is that we shouldn't be befuddled by what I call bogus quantification. We do not know many things about this virus-- the speed at which it will proceed, the number of people who are already infected, the number of people who have died from it who wouldn't otherwise have died in short order. And so predictions of how far the crisis will spread and for how long we will need to keep in place the current restrictions are really almost impossible to make, and therefore what we do need is real honesty and transparency on the part of politicians and experts too.

And therefore what we do need to do is to think carefully about what it is that we do know. And one thing we do know is that we need a lot of tests on people in the population as a whole in order to find out how many people have this disease and have had it. That will enable us to work out how serious the epidemic is likely to be and its likely course in the future. And what we also need to do is to spell out an exit strategy from the very costly restrictions that are being imposed which are having the effect of shutting down large parts if not the whole of the economy.

BRIAN SOZZI: Mervyn, Brian Sozzi here. Good to speak with you again. You know, and even looking forward, the outlook-- or just the outlook is radically uncertain. So in your view, what does the global recovery look like looking out over the next year or two in the context of what we saw coming out of the Great Recession?

MERVYN KING: So I think it will look very different, and it will depend critically on the policies which governments put in place. If we have an exit strategy which explains to businesses clearly that as we learn more about the extent of the epidemic and for how long we will need to keep the restrictive measures in place-- if that exit strategy holds out hope that businesses will be able to restart and that people who have immunity can go back to work, then we could see a very sharp rebound and get back to normal sometime in the autumn, second half of the year.

If, on the other hand, governments do not have any exit strategy and simply carry on pretending that they know for how long we will need these measures, and then if it turns out we need them for longer, then it may be the case that too many businesses will have disappeared that it will be difficult to persuade banks to support businesses which they find in real difficulty today but which we will need to come back in the second half of the year when the epidemic is over. If we don't have that clarity, then we could easily find that too many businesses have already gone out of existence and that any recovery will then be very slow and protracted, and we will suffer the same sort of problems that we did after the financial crisis of not having a speedier recovery back to where we would have been before the crisis occurred.

EMILY MCCORMICK: There's been talk here in the US about a fourth round of fiscal stimulus, and we were talking a bit about quantification. So what metrics are you actually using to measure the efficacy of the monetary and fiscal response right now and whether these actually need to be stepped up further?

MERVYN KING: So I think the metric is whether you can imagine that a small- or medium-sized business-- and especially the self-employed-- can actually obtain support, first of all, in the form of borrowing or help with cash flow. This is not a time when governments should be collecting taxes from the private sector. It should be lending to the private sector in the form of not collecting taxes.

And secondly, there needs to be compensation in the form of the government providing grants which are effectively acting as a purchaser of last resort. We need the government to step in now. And during the duration of these restrictions where the government is deliberately pushing down economic activity as an act of public-health policy, it needs to reimburse businesses for the lost takings, which are no fault of their own and do not tell us anything at all about the long-run viability of those businesses.

Now if we can put an exit strategy in place, then the length of time for which these payments will be needed will be much shorter than would otherwise be the case, and that means that then the businesses will be there so that when we return to normal, a market economy can start to function again. At present, the market economy is in, to some extent, in a kind of deep freeze, and the process of allowing businesses to fail and creating new businesses can't really operate normally until we get past the point when these restrictions are needed.

ALEXIS CHRISTOFOROUS: Mervyn King, former Bank of England governor and author of "Radical Uncertainty-- Decision Making Beyond the Numbers," thank you so much for being with us and for sharing your insights. Be well.

MERVYN KING: A pleasure. Thank you, and be well too.