Award-winning financial journalist Gillian Tett joins IPPR director and Juncture co-editor Nick Pearce to discuss the great expectations surrounding new Bank of England governor Mark Carney, the state of economic thinking in post-crash Britain, and the likelihood of a recurrence of the financial crisis of 2008.

NP: Much has been made of Mark Carney's approach to monetary policy - setting long-term expectations and debates about nominal GDP and so forth. Perhaps less has been said about the bank's new roles in macroprudential regulation and financial stability. There is an argument made that monetary policy wont be able to do the work it needs to do if the banks are too constrained, and if the macroprudential regulation is too tight, they aren't going to be lending to the real economy, and therefore monetary activism won't work. Is there any truth in that analysis from your point of view?

GT: Absolutely there's truth. The problem is that the credit transmission channels in the UK are if not broken then at least severely impaired. One of Mark Carney's big problems is, therefore, that the main machinery which he would normally use to transmit policy and price signals is not transmitting correctly. Certainly at the moment there doesn't seem to be much appetite for trying to create alternative channels in the form of state-run banks that can lend directly. So, frankly, you're between a rock and a hard place - no one wants to repeat the mistakes of 2006 and have banks making lots of cruddy loans, but at the same time, without a bit more lending it's going to be very hard to get the economy going. So he faces a big challenge.

NP: Do you think expectations are too high for Carney's arrival?

GT: Expectations are definitely too high. He's a very bright man. He's extremely impressive. But he faces a very, very tough task.

NP: What do you think he needs to do to change the culture of the Bank of England? Obviously it has new powers and responsibilities, but what culturally needs to change under his leadership?

GT: I think in the run-up to 2007 there were terrible decisions made, partly because of stove-piping and tunnel-vision, a total failure to join up the dots and an obsession with macroeconomics, in the general downplaying of market analysis. Post-2007, a lot of those issues were recognised by the bank. The bank itself has already tried to address many of these big issues with all manner of mea culpas and internal reports. Frankly, I don't know any other central bank in the west that has engaged in so much navel-gazing and self-criticism, and actual tangible reform, as the Bank of England. It's created a whole new committee, it's reorganised itself. Both at the micro and macro level some of the changes have been significant.

The first key thing that Mark Carney will have to do is ensure that the tendency to fall back into silos and to have underlap between them does not repeat itself. He must make sure the bank remains keenly aware of the need to link market analysis with macroeconomic analysis, and that it tries to take a joined-up view of the world. But the second key thing is that he must be willing to take risks, because the reality is that interest rates are already at astonishingly low levels - basically a 300-year low in terms of yield - so it's going to be very hard for Carney to find new ways to provide stimulus into the economy when it's needed. I think probably the best thing to do would be to prepare to tolerate a bit more inflation. But that would be something that wouldn't fit easily within the bank's culture today. I'm also quite a fan of using a nominal GDP target rather than a real one.

NP: In that context, are you sympathetic to the major reflation programme that the Japanese authorities have embarked upon?

GT: I think it's probably a sensible step in some ways, in that it could help to create serious momentum. But it is only part of the solution. What's needed in Japan are radical structural reforms, more flexible labour markets and so on, but what's so disappointing is that you don't yet see much sign of any of these yet. The danger is if what they implement in Japan is massive easing without badly needed reforms - for example, to ensure that companies actually start handing cash back to shareholders, to ensure significant labour market reform, and to attack demographic issues - you'll be pouring a lot of money into a black hole. It will be piling up lots and lots of brushwood without a match to actually start the fire.

NP: We've been very preoccupied with the fiscal debate in the UK, and yet you hear less about the kind of issues that you've been raising - about banking reform and what the new governor might do. In the end, the questions you're raising about the regulators and what they do, the structural issues that you need to address in the economy, they do come down to policymakers and back to politicians in particular. What do you make of the state of economic policy and the state of political thinking about economics in the UK?

GT: Firstly, people are very bored of banking reform. There was a brief flurry of it for a year or two but now that's really died down. Frankly, most ordinary voters - and politicians - want the banks to behave well, lend money, not collapse and not pay their bankers obscenely large bonuses. Beyond that, they really don't care too much about the details, no more than the average person or politician cares about the details of how the healthcare system works and how the drugs companies develop your medicine - they just want something that works and doesn't look too dangerous. I think that's entirely understandable.

In terms of the bigger economic debate, what fascinates me, having spent time in America, is just how little ideology there has been expressed in a lot of the economic debate in the UK in the last couple of years. If you go to America there's a raging, seething debate going on about whether you should have big government, small government, whether you should have tax hikes, tax cuts, fiscal policies. It's absolutely, fantastically polarising. It's quite hard to find a pragmatic centre in the US at the moment, in terms of the political discussions. Similarly, you've got a significant minority of the political class calling for the Federal Reserveto be abolished, expressing fury about quantitative easing. There's real anger about what central banks are doing.

You don't have that similar voice in the UK, where frankly much of the debate has been pretty pragmatic and centrist. If you look at the difference between Labour and the Conservatives on some policy there is a bit of difference, but not a dramatic amount - and you don't have anyone that I've heard calling for Mervyn King to be deposed. The one area where there is a raging ideological debate going on right now is on Europe, a single currency, and the UK's membership of the European Union. And that's a point at which all sense of pragmatic centrism tends to evaporate as far as the Tory party is concerned. That's perhaps going to be the key flashpoint over the next year or two.

I think the economic policy debate within the UK is not bad. I happen to disagree with both aspects of the current policy mix - I'm a great fan of using the fact that borrowing costs are ultra-cheap to invest more in infrastructure right now. But what strikes me overall is that the debate is still pretty pragmatic, not ideological, at least when it comes to the issue of fiscal policy.

NP: On the point about Europe - would you say that the City of London would remain a global financial centre if Britain was outside the European Union?

GT: That question is impossible to answer because it depends on the terms on which Britain exists outside the union. I think it would be very tough, frankly. As Martin Wolf has pointed out, America wouldn't dream of, say, putting the main dollar financial centre in Toronto. In the same way, I think it would be very hard to imagine Frankfurt or Paris putting the main euro trading centre in London if it was outside the European Union. But it's very hard to make predictions, because who knows what the euro or the European Union will look like in 2017 when the referendum occurs, and who knows on what terms the UK would or would not be out.

NP: On the balance of probabilities or forces, what would your prediction be about chances of a recurrence of kind of crisis we've had in 2008?

GT: The chances of the same kind of crisis coming as a result of private sector borrowing, let alone mortgage debt: zero. The chance of a nasty financial jolt occurring in the next two years: relatively high.

This is because I believe that what quantitative easing has done on this massive scale is to create the illusion of stability and some sense of calm recovery in the market. It is striking if you look at measures of volatility, for example. The classic measures of market volatility are very low and spreads are very tight. However, once again, rates are behaving in an astonishing way, and what's really startling is the degree to which markets and asset prices are diverging from fundamentals. If you track say, unemployment, equity markets - if you track things like levels of leverage in the European high-yield market, credit spreads, all of those indicators - then those relationships have broken down in the last year or two. The reason is very simple and that's that the central banks have blanketed the system with money - about $7 trillion to date and still counting, in terms of the total volume of quantitative easing. And that's had a profoundly distortive effect.

The problem is that the illusion of stability is fragile, and I suspect that what central banks have done is to ensure that if a medium jolt to the system does occur then the markets will absorb that and can go back. But if a big jolt occurs - such is the level of distortion and, once again, the degree to which easy, free money has enabled investors to turn a blind eye to the fundamental weaknesses and shortcomings in the system - you can actually see a very nasty, cataclysmic end.

This is an edited version of the full-length interview which appears in issue 20(1) of Juncture, IPPR's journal for rethinking the centre-left.