Mr William White joined the Bank for International Settlements in June 1994 as Manager in the Monetary and Economic Department, and was Economic Adviser and Head of the Monetary and Economic Department from May 1995 to June 2008. Some notes from his paper:
- Unfortunately, Government policies have short term outlooks, generally over the next 2 years, similar to short sited businesses, creating highly procyclical policy approaches that exaggerates booms and busts.
- Policy makers extrapolate the recent past as a testament to their own success, paying little attention to the long term moral hazards they create.
- “Once a bubble bursts, attention shifts to the way the bubble manifested itself in the form of instruments, techniques and the like, while the key factor- speculation- is ignored.” John Kenneth Galbraith
- The political elite tend to focus on “what is different this time” when examining the problem
- They conveniently surmised it was the banks and CDO’s were the problem, a convenient scapegoat in line with human nature says that “someone must be blamed”
- The other school of thought focuses on “what is the same”
- Here you will find the imbalances created by the Federal reserves cheap credit pumped into the economy, as is the historical norm.
The expansion phase of the last credit cycle, and the associated buildup of “imbalances” began in the summer of 2003 . First, virtually any asset price you can think of, including most experienced an inflection point at that moment and then continued to rise rapidly to inexplicably levels. Second, credit standards were repeatedly lowered, leading to a massive increase in sub lending to households, coy-lite loans to corporations and similar increases in other loans (not commercial property) based on rising collateral values. Credit and term premia collapsed as did the of insurance against bad events. Through both lower lending standards and increased leverage, the exposure of banks and financial institutions rose sharply.
- Falling household savings and investment ratios in China were also factors
- The crisis erupted at a “Minsky moment” in the summer of 2007, catalyzed by BNP’s decision to halt withdrawals from three of its off balance sheet vehicles. However, its underlying cause was the nexus of credit driven imbalances described above. It was an accident waiting to happen, and could have started anywhere.
- Central Banks were highly culpable by providing the credit, for the credit boom, that led to the credit bust.
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What is the same this time?
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