INSUBCONTINENT EXCLUSIVE:
By Mervyn KingA decade ago, we thought the banking crisis was over and the expansion already visible in emerging economies would spread to
The International Monetary Fund just lowered its estimate of world growth both this year and next
Every data release seems to bring gloomy news
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 economy is stuck in a low-growth trap
The question is why.
The Great Depression was followed by political upheaval and, in economics, an intellectual revolution
That needs to change.
Modern policy makers operate in a world of radical uncertainty
Today, the key features of standard models lead us astray in judging how to get the world economy out of its lowgrowth trap, and how to
This seems to fit because the underlying growth of productivity appears to have fallen
our prevailing model of monetary policy
This model finds it hard to accept that the investment required to stimulate production might be held back by extreme uncertainty
As a result, it accepts too readily that market economies are self-stabilizing.
Escaping from a low-growth trap sprung by radical
It requires instead a reallocation of resources from one component of demand to another, from one economic sector to another, and from one
company to another.
In some cases, the world has invested too much
China and Germany, for instance, have overinvested in manufacturing for export
Also, asset values in many places will need to be written down to more realistic levels, and some financial intermediaries will have to be
These are structural weaknesses
Exchange rates, supplyside reforms and policies to correct unsustainable national saving rates need to be part of the mix.
Consider Europe
Further monetary easing and a weaker euro might help recovery in the south but would further distort the structure of economies in the north
Until France and Germany can resolve their differences over structural reforms to the monetary union, monetary stimulus on an even larger
scale is not just papering over the cracks but also widening them
I am tempted to say that the best advice to the new president of the European Central Bank is to stay in Washington.
New thinking is also
needed when it comes to dealing with financial crisis
The last one led to the Great Stagnation and was obviously costly in terms of lost output, but it was also expensive in financial terms
A recent IMF study found that the cost of interventions, including guarantees, to support financial institutions between 2007 and 2017 in 37
countries amounted to $3.5 trillion
potentially all debt issued by the financial sector must be guaranteed by the government in a crisis, the issue is not whether the Fed or
maturity transformation are accepted in return
related to the maturity transformation of the individual financial institution
Whatever the details, the imperative is to establish an ex ante framework for the provision of central bank liquidity
into a conflagration that threatens the entire system
of the Treasury and the Fed to fight the next crisis
ante framework that makes banks, and other maturity-transforming institutions, part of an insurance system that is accepted as fair
system that entitled them to borrow in bad times.
In addition, radical uncertainty means that the liquidity of particular assets in some
that liquidity is adequate
The response to the crisis combined excessively detailed regulation with a plea for greater freedoms for firefighters
Complex regulation imposes unnecessary costs of compliance and gives a false sense of security
And the absence of an agreed upon ex ante framework demands almost unlimited resources without the appropriate political authority.
The Fed
and other central banks need to help legislators to see just how vulnerable financial systems will be in the event of a future crisis
Next time, Congress will be confronted with a choice between financial Armageddon and suspending the rules it introduced after the last