Former BIS chief economist William White sees a bank crash coming, in an interview published today by the Swiss financial paper Finanz und Wirtschaft, and headlined “I see the same price bubbles as in 2007”.
White, an American economist now resident in Texas, says:
“No one has ever seen anything like this. Not even during the Great Depression in the Thirties has monetary policy been this loose. And if you look at the details of what these central banks are doing, it’s all very experimental. They are making it up as they go along. I am very worried about any kind of policies that have that nature.”
Singling out the Federal Reserve, White adds:
“The Fed has moved to a completely different motivation. From the attempt to get the markets going again, they suddenly and explicitly started to inflate asset prices again. The aim is to make people feel richer, make them spend more, and have it all trickle down to get the economy going again. Frankly, I don’t think it works, and I think this is extremely dangerous.”
White told Finanz und Wirtschaft that the fundamental problem is debt, not government but rather private debt held by banks and other financial institutions which is non-performing and/or impaired. It is being “evergreened” [extended at full book value] by the banks, he says, with the aid of the central banks’ money-printing. That debt has to be written off, and it is governments’ responsibility to act, not central banks. “Central banks can’t rescue insolvent institutions,” White says. Asked if massive writeoffs won’t further hurt the bank sector, he agrees:
“But you see, we have a lot of zombie companies and banks out there. That’s a particular worry in Europe, where the banking sector is just a continuous story of denial, denial and denial. With interest rates so low, banks just keep evergreening everything, pretending all the money is still there. But the more you do that, the more you keep the zombies alive, they pull down the healthy parts of the economy.”
“It all looks and feels like 2007. And frankly, I think it’s worse than 2007, because then, it was a problem of the developed economies. But in the past five years, all the emerging economies have imported our ultra-low policy rates and have seen their debt levels rise. The emerging economies have morphed from being a part of the solution to being a part of the problem.”