Former UK bank boss warns of 'financial Armageddon'

Mervyn King, former Governor of the Bank of England, speaks during the Bank's quarterly inflation report news conference in 2009. Photo / Getty Images

The world is heading for a political and economic crisis which could unleash a "financial Armageddon", former governor of the Bank of England Mervyn King has warned.

King called for the old orthodoxy of monetary policy to be abandoned and argued that by pretending we have made the banks safe "we are sleep-walking towards crisis".

"If the problem before the crisis was too much borrowing and too much spending then the problem today is too much borrowing and too little spending. The world is caught in a slow growth trap," King said.

Delivering the keynote lecture to financial leaders at the International Monetary Fund, the former governor argued that the rules introduced by the US Congress after the crisis of 2007-09 meant that US central bank, the Federal Reserve, lacked the powers to act and that could result in a "financial Armageddon".

King says the priority for policymakers is to get the world out of the trap of slow growth and "to prepare for the next financial crisis".

"Following the Great Inflation, the Great Stability and the Great Recession we have entered the Great Stagnation," King said.

The former governor stepped down from the Bank of England in 2013 after 10 years in the job, having helped steer the UK through the storm of the financial crisis and the meltdown in the euro area.

He has been an outspoken critic of the eurozone and has favoured Britain's departure from the European Union.

He made no direct reference to Brexit, steering clear of being drawn back into the national debate at a critical moment. But he noted that indexes used to measure uncertainty in the global economy were flashing red.

He claimed the policy risks are higher than they have been for years and exceeded those at the time of the eurozone crisis a decade ago.

The uncertainty had led to what economists call an era of "secular stagnation" where it becomes impossible for nations to escape low growth.

Another economic and financial crisis "would be devastating to the legitimacy of a democratic market system", King added.