Mitch Feierstein: We put out one fire but now Mark Carney wants to start another

Midweek View: You do have to wonder if his departure from the land of grizzlies and maple syrup has sent the poor man crazy

Mervyn King's decade at the Bank of England was a disaster. The Bank was too slack during the long and indisciplined boom, under prepared for the crash and playing catch-up thereafter. The legacy of Lord King's (and Gordon Brown's) career has been an economy still limping along far below peak output, real wages caught in a vice. Few recent careers have more comprehensively failed.

But it wasn't all bad. In that long decade of failing banks, easy money and over-protection of creditors, Lord King at least clung to one last shred of decency. If a failing bank, or other lender in distress, wanted to borrow money from the Bank of England, it would be obliged to offer reasonable collateral, borrow for relatively short periods – and be made to pay real money for the privilege. Yes, the result could look punitive, but that, in Lord King's mind, was the point. Banks are meant to run themselves so that they do not need to obtain bailout funds from the Bank of England. If they foul up, then they – their shareholders, managers and creditors – should be on the hook, not taxpayers or prudent savers. It's a rule that has served capitalism well enough for the last five centuries. Lord King was the last major central banker on Earth to cling to this belief. He was alone, but he was right.

Mark Carney has ditched all that. In a recent speech, the new Bank Governor spoke about the need to "keep up" with developments elsewhere and promised to make emergency credit cheaper and quicker, adding that the range of assets the Bank would accept as collateral would be wider. In effect, this is a promise of cheap money, slackly administered – a fire hose of liquidity.

The head of the European Central Bank (and, like Mr Carney, once of Goldman Sachs), Mario Draghi, once promised to save the euro by "doing whatever it takes". That promise has led to some sweet returns for the financial sector, but at the cost of keeping rotten banks afloat with loans and encouraging the good ones to weaken their balance sheets. Thanks to Mr Carney, we're now getting the same.

The move is disastrous. The Bank is already permitting yet another unsustainable boom to run unchecked. Rightmove, the property website, last week said London house prices had risen £50,000 in a month. The Bank liquidity pump is supplying petrol to that fire, while George Osborne's Help to Buy scheme strikes the match.

Less widely noted, but equally crucial, the UK equity market has almost doubled since its 2009 low, while the German and many US equity indices hit all-time highs. The tech-heavy Nasdaq exchange is now seeing the return of valuations, while junk bonds trade at interest rates well below those offered by AAA-rated bonds some 20 years back. Indeed, the US Federal Reserve, normally so relaxed about these things, became so concerned last week that it sent a warning letter to the likes of Goldman regarding the "low quality of leveraged loans".

Given the state of the global economy, the only possible cause of these surging asset prices is the wholesale purchase of financial assets by the Bank, the Federal Reserve and other central banks. This is central banking via asset bubble creation: QE Infinity, a path without exit.

Mr Carney, far from wanting to damp this activity down, seems keen to extend and enlarge it. The assets (and also the liabilities) of the British banking sector are now around four times national income. You only have to look at the destruction wreaked on Ireland and Iceland to understand the risks of running an engine on a chassis too small to bear the load.

But Mr Carney doesn't care. Noting nonchalantly that, based on current trends, British bank assets would grow to nine times the size of the economy by 2050, he suggested – quoting the former Barclays chief Bob Diamond – that it was time to welcome an industry that can "be both a global good and a national asset".

You do have to wonder if his departure from the land of hockey pucks, grizzlies and maple syrup has sent the poor man crazy. Yes, of course, the UK cannot simply wish its financial industry away from these shores. And yes, it creates jobs and pays taxes. And yes, the Bank of England is making some genuine efforts to improve both bank capitalisation and bank risk management.

But who is he kidding? No country ever, anywhere, has managed to abolish financial crises. Since the birth of modern banking, there have been regular crises. No sooner is one stable door locked, bolted, watched and guarded, than a new door emerges somewhere in the unlit spaces far from view – somewhere you haven't even thought to look. Our current financial crisis has already caused the longest depression not only in British but in European history. It's almost impossible to imagine how bad the next one will be.

The fact, as psychologists have observed, is that humans are prey to both optimism bias – things will turn out better than they do... it's different this time... hey, I'm smarter now – and anchoring bias – the future probably looks a little like today.

To these two factors add the reality that the "sell side" in financial markets – roughly speaking, Goldman Sachs and its peers – is far better resourced, vocal and politically connected than the poor old "buy side" (roughly speaking: you and your battered old pension fund). The result is that our financial markets are at permanent risk of inflated valuations and irrational exuberance.

We can't change reality. Greed will always have a tendency to win out over experience. Asset markets will always want to froth. Industries with money will always secure more political influence than they ought to have. The best-regulated markets will always be well protected against the last crisis, but vulnerable to the next one.

These things we can't alter. They are the financial world's equivalent of Original Sin – the result of our fallen state. But we don't have to make things worse. We could tackle excess leverage and poor asset quality instead of just playing "extend and pretend, pray and delay, divert and deflect". We don't have to tell bankers that moral hazard no longer applies. We don't have to use central bank (that is, in effect, taxpayer) money to inflate unsustainable asset bubbles. We don't have to watch complacently as yet another unsustainable boom is born of yet another unsustainable bubble.

A crisis is unfolding, born of excess debt and excess leverage in toxic combination. That crisis is unfolding now. And neither Mr Carney nor our politicians are doing anything about it.

Mitch Feierstein is the author of 'Planet Ponzi' and chief executive of the Glacier Environmental Fund

Start your day with The Independent, sign up for daily news emails
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

Where the spooks get their coffee fix: The busiest Starbucks in the US is also the most secretive

The secret CIA Starbucks

The coffee shop is deep inside the agency's forested Virginia compound
Revealed: How the Establishment closed ranks over fallout from Loch Ness Monster 'sighting'

How the Establishment closed ranks over fallout from Nessie 'sighting'

The Natural History Museum's chief scientist was dismissed for declaring he had found the monster
One million Britons using food banks, according to Trussell Trust

One million Britons using food banks

Huge surge in number of families dependent on emergency food aid
Excavation at Italian cafe to fix rising damp unearths 2,500 years of history in 3,000 amazing objects

2,500 years of history in 3,000 amazing objects

Excavation at Italian cafe to fix rising damp unearths trove
The Hubble Space Telescope's amazing journey, 25 years on

The Hubble Space Telescope's amazing journey 25 years on

The space telescope was seen as a costly flop on its first release
Did Conservative peer Lord Ashcroft quit the House of Lords to become a non-dom?

Did Lord Ashcroft quit the House of Lords to become a non-dom?

A document seen by The Independent shows that a week after he resigned from the Lords he sold 350,000 shares in an American company - netting him $11.2m
Apple's ethnic emojis are being used to make racist comments on social media

Ethnic emojis used in racist comments

They were intended to promote harmony, but have achieved the opposite
Sir Kenneth Branagh interview: 'My bones are in the theatre'

Sir Kenneth Branagh: 'My bones are in the theatre'

The actor-turned-director’s new company will stage five plays from October – including works by Shakespeare and John Osborne
The sloth is now the face (and furry body) of three big advertising campaigns

The sloth is the face of three ad campaigns

Priya Elan discovers why slow and sleepy wins the race for brands in need of a new image
How to run a restaurant: As two newbies discovered, there's more to it than good food

How to run a restaurant

As two newbies discovered, there's more to it than good food
Record Store Day: Remembering an era when buying and selling discs were labours of love

Record Store Day: The vinyl countdown

For Lois Pryce, working in a record shop was a dream job - until the bean counters ruined it
Usher, Mary J Blige and to give free concert as part of the Global Poverty Project

Mary J Blige and to give free concert

The concert in Washington is part of the Global Citizen project, which aims to encourage young people to donate to charity
10 best tote bags

Accessorise with a stylish shopper this spring: 10 best tote bags

We find carriers with room for all your essentials (and a bit more)
Paul Scholes column: I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England

Paul Scholes column

I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England
Jessica Ennis-Hill: 'I just want to give it my best shot'

Jessica Ennis-Hill: 'I just want to give it my best shot'

The heptathlete has gone from the toast of the nation to being a sleep-deprived mum - but she’s ready to compete again. She just doesn't know how well she'll do...