William White: Are Central Banks Trying To Do Too Much?

Welcome to our new video series called "New Economic Thinking." The series will feature dozens of conversations with leading economists on the most important issues facing economics and the global economy today.

This episode features William White, chairman of the Economic Development and Review Committee (EDRC) at the OECD in Paris. White explores whether central bankers are now being asked to do too much: whether in pursuit of elusive goal of financial stability, central bankers are risking the hard won gains of previous decades, and undermining their popular legitimacy in the process. Below is an introduction from interviewer and Director of Institutional Partnerships Marshall Auerback

The breakdown of the Bretton Woods system ushered in an unprecedented phase for the world economy.

At no other time in modern history had the world seen the prices of goods and services rising so fast, for so long, and in so many countries. Led by figures such as Paul Volcker, central bankers appeared to succeed in restoring long elusive price stability and ushered in a 30-year bull market in financial assets as a consequence. Developed economies in particular experienced a long period of stability in terms of inflation and economic growth, which prompted U.S. economists to call this period the “Great Moderation.” Central bankers looked like omniscient heroes.

On the financial side, however, things were not as smooth, as the financial fragility of the economy increased and several financial crises occurred. In the U.S. alone, there was the Savings and Loan crisis, the Long-Term Capital Management crisis, and the dot-com bubble. Even though the effect of these crises on the economy was contained through government and central bank interventions that had been growing in size since the 1960s, questions were beginning to arise about monetary policy and the rise of moral hazard as a consequence of responses to these recurrent episodes of systemic instability.

In the wake of the Great Financial Crisis of 2008, central bankers have been forced to adopt increasingly unconventional policies in order to try to mitigate the worst effect of the fallout. But have they gone too far? Have we reached a point where the unintended consequences of the “cure” actually worse than the disease? This question is one that has increasingly agitated prominent central banking practitioners, such as William White, currently chairman of the Economic Development and Review Committee (EDRC) at the OECD in Paris and formerly with the Bank of International Settlements, Bank of England, and Bank of Canada.

In the above interview, White explores whether central bankers are now being asked to do too much: whether in pursuit of elusive goal of financial stability, central bankers are risking the hard won gains of previous decades, and undermining their popular legitimacy in the process. Watch the interview to see what he has to say!



My own two cents. The neoclassical systhesis as described by minsky has adopted the worst of the worst rules and thinking. That's by design and advantage of the financial services industry.

I have long thought the best view would be a combination of austrian and Keynes. The inability of economic policy makers to look at the laibilities side of the balance sheet astounds me. I firmly beleive that lenders who lend to people who can't pay back the debt need to be wiped out. That is their business, if they can't price risk correctly, they should go out of business as any other business should.

In theory the main reason I support gold or a hard currency is because lebders and people can't be trusted not to over extend credit. there has to be limits on credit expansion.

The reason I knew we were going to have a disaster recession is because I researched that households had high mortgage debt, home equity loans, and high credit card debt.Which means any disruption of the system prevents that debt payment schedule. Oil hit 147$ (I recall the oil crisis of the 70's) and knew that was it.

What I didn't know or even fathom was the the policy elites could ever allow banks and the financial system to operate with so much leverage, rehpothication etc. The intellectual blind side is /was beyond measure. The assumptions of deflation need to be re-examined.

I do not beleive deflation causes all of the ills ascribed to it. I do believe the destruction of margin in an over leveraged system cause those problems. As I look at crisis, the common cause seems to be over leverage/ too much credit as the cause. Central bankers seem to address the symptoms after the burst, and not address the causes.

How bernake could look at the great depression and not include leverage/ credit in his views astounds me. Then of course the japan bubble/

The proper policy of the fed after this crisis should have been the qe, and as qe continued margin requirements should have been raised.
the targeting of asset prices is a mistake and leads to excessive leverage again creating future instbility.

Increasing margin requirements should in theory make trading less profitable (the big wall streeet banks are now making a large part of their profits by trading), and should help to move capitial into the real economy. It's the same reason you want a financial transaction tax.

The system creates insentives not to lend. if I get cheap money and have effectively zeroc costs of trading, and policy is to increase those asset prices at 2% a year or more (the cost of capitial less than inflation). the smart thing to do is lever up because in theory those profits are risk free because of central bank policy.

Not only that but lending could help the "economy" and cause central banks to raise the cost of capitial. Not something I want as a banker.

My conclusion is Qe policy is all about the banks, banking system. raising asset prices makes the banks healthy again and covers up for many central bank policy errors. It is the only rational reason I can think of for a continued Qe policy that doesn't come close to the predicted effects central banks said it would


I made the last post, and surprise from jackson hole this weekend:

"Reuters) - Global financial stability is at risk as central banks draw back from ultra-easy policies that have flooded the world with cash , top officials were warned on Saturday.


My statement:
targeting of asset prices (I also mean inflation targeting) is a mistake and leads to excessive leverage again creating future instbility.

I don't have an economics degree. they didn't raise margin requirments, didn't do anything along the lines I said, (which would have increased stability). Now we are in a catch 22. the very policy they used to fight the crisis, caused more instability, which of course justifies more extreme monetary policy.

This is some kind of Joke, and the sad thing is the vast majority of the public and economists seem to have bought into this nonsense.

LOL. Now we can't stop it because of the problem they created, which just happens to be a policy that helps the financial services sector the most and the wealty the most (people with the most assets). It is one big con game


sorry last comment. To top off the irony you had krugman in the friday NYtimes telling his readers that the fed and monetary policy doesn't cause asset price bubbles. Strangely many readers seem to beleive him. and the next day you have warnings at jackson hole about loose monetary policy.


The genie (globalization) is out of the bottle. We cannot use antiquated monetary policies albeit successful in the past to tame this beast. Volatility is the norm when the pool of liquidity (greater than any government or institution flows across borders. Signals are just noises in a G zero world. Only in a global crisis you can muster a brave front to temporarily calm the storm. There are no more weapons and today's markets can call the bluff of any central bank. Yes, just sweat the big waves in building networks of crisis groups across the globe and include the private sector hedge funds, sovereign wealth funds and other emerging 'influencers' of large liquidity pools. (IMF and World Bank are histories). This allows only for an organized infrastructure to speedily transmit signals in crises. Leave the minor volatility alone even if they appear to threaten inflation, etc. You cannot know what low volatility can harm or benefit.


yeah, I'm the guy who keeps postng on this topic, and have been saying it for years, but now someone at jackson hole seems to have picked up on it and presented it. yes in the past I have advocated capitial controls.

Fed determines global financial cycle - Jackson Hole paper
(Following is the fourth and final report based on papers presented at the 2013 Jackson Hole Economic Policy Symposium, hosted by the Federal Reserve Bank of Kansas City. The reports have been published as soon as the authors presented their papers to the symposium.)

A global financial cycle, mainly determined by U.S. monetary policy, constrains national monetary policies when capital is freely mobile regardless of the exchange rate regime, according to a paper presented at the Jackson Hole symposium by Helene Rey of the London Business School.
In her paper, “Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence,” Rey shows how global capital flows, asset prices, credit growth and financial leverage tend to move in sync with the VIX, the ticker symbol for the Chicago-traded index that measures uncertainty and risk aversion in financial markets. “The dollar is the main currency of global banking. Since surges in capital flows – especially credit flows – are associated with increases in leverage worldwide, a natural interpretation is that monetary conditions in the centre country are transmitted worldwide through these cross-border gross credit flows,” she says.
To fully understand this interaction between U.S. monetary policy, risk aversion and uncertainty, leverage and credit flows, Rey builds on earlier work by other economists and analyses the relationship between the VIX and growth, inflation, forms of credit, leverage and the federal funds.
“When the Federal Funds rate goes down, the VIX falls (after about 5 quarters), European banks’ leverage rises, as do gross credit flows (after 12 quarters),” she says.
This helps set up a positive feedback loop between loose monetary policy, a fall in the VIX, a rise in credit, capital flows and leverage and then a further fall in the VIX.


Me and since the increased leverage results in instability, we get to do it all over again, and again, and again

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