The deputy governor of the Bank of England has admitted that the Bank did not realise the full extent of the economic maelstrom that was to come, but did not have sufficient powers to stop it, even if it had known.
Sir John Gieve, who is on the Bank's Monetary Policy Committee, told the BBC that the Bank knew about the "crazy borrowing" which was going on and that the boom in the property markets and other sectors was "rising unsustainably", but it underestimated the full extent of the consequences.
In an interview for Panorama, he said that Bank of England
relies too heavily on interest rates, which are a "blunt instrument" for dealing with specific problems because they affect the entire economy.
"We need to develop some new instruments, which sit somewhere between interest rates, which affect the whole economy... and individual supervision and regulation of individual banks," he told the BBC's business editor, Robert Peston.
Sir John, who is stepping down next year, is responsible for financial stability, and was lambasted last year when Northern Rock's business model led to its downfall while regulators stood by.
Now that the taxpayer owns Northern Rock, as well as having a stake in Bradford & Bingley
, Sir John said that he doubts whether the Chancellor Alistair Darling will be able to claw back all the taxpayers' money that has been pumped into the bank and the rest of the financial system.
"There are some books: Northern Rock, Bradford & Bingley, which the taxpayer's now holding, which clearly have a level of defaults in them, [I'm] not quite sure how that will balance out against the residual of the capital," he said.
For the mainstream banks, however, he believes that it is only a matter of time before they "revive and stat building and growing as commercial entities again."
The Bank "did not understand the crisis" he said, which turned out to be a "major storm we haven't seen the likes of for 100 years."
He added that the Bank is "learning lessons" from the current economic turmoil and did what it could to prevent it, which was to cut rates drastically from 4.5 per cent to two per cent in the space of just three months, but that more powers are needed so that the Bank can act more effectively to stave off a similar situation if the lending bubble returns in the future.
Panorama: The Year Britain's Bubble Burst airs tonight on BBC1 at 8.30 GMT.
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