William White, former chief economist of BIS and one of the few who foresaw and warned policymakers on the economic crisis, explains the causes of the economic crisis in a talk he is to give at an upcoming conference (hat tip Mark Thoma):
While private sector behavior (“procyclicality”) played a crucial role in this event, central banks also contributed heavily. It is likely not a coincidence that the expansion phase of the last credit cycle began with policy rates at their lowest in the major industrial countries. As well, with increases in policy rates carefully signaled, there was an open invitation to take on more leverage in response to declining carry margins as policy rates rose. Further, in emerging market countries, upward pressure on their exchange rates was fiercely resisted through both FX intervention and easier monetary policy. In this way, the problem of excess “liquidity” became truly global. Finally, it is not farfetched to suggest that many of the developments that made this crisis “different” were also encouraged by low policy rates. These led to more risk taking in ”the search for yield”, as well as efforts (off balance vehicles and new instruments) to disguise these risks. Unfortunately, disguised risk is not the same as reduced risks, as eventually became apparent.
I would summarize his three points above as follows: (1) central banks in advanced economies kept interest rates far below their neutral level which created a credit boom, (2) this excessive monetary easing in the advanced economies spread to the emerging market economies through their exchange rate policies (e.g. the dollar bloc countries imported the loose U.S. monetary policy), and (3) the low rates in the advanced economies created further distortions via the risk taking channel. All of these developments were compounded by the procyclicality of the financial system. I couldn't agree more.
White goes own to discuss the need for a new analytical framework, one the incorporates the best of Keynesian, Austrian, and Minskyian insights. This is a point he made earlier in an IMF paper. This looks to be an interesting conference with many important thought leaders participating.
White goes own to discuss the need for a new analytical framework, one the incorporates the best of Keynesian, Austrian, and Minskyian insights. This is a point he made earlier in an IMF paper. This looks to be an interesting conference with many important thought leaders participating.
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