Global Debt Risk: Are We Ready For The Next Crisis Global Debt Risk: Are We Ready For The Next Crisis? Presentation by William White www.williamwhite.ca “ 10 Years After the Crisis - Modelling Meets Policy Making” OECD-NAEC and the Fields Institute Fields Institute Toronto, Canada 15-16 January 2019

Three kinds of policy action required Crisis prevention measures - inadequate to date Crisis management measures – increasingly hard to implement Crisis resolution measures – ever more necessary but ineffective Further debt buildup might lead to very bad outcomes Media:Project Syndicate, Dec. 2017

Crisis prevention: the role of monetary policy The dangerous delusion of near-term “price stability” Monetary policy since 2008 essentially “more of the same” Has lacked effectiveness in stimulating aggregate demand But has contributed to a massive increase in global debt As well as more financial instability And lower potential growth Media: Project Syndicate, December 2017

Crisis prevention: the role of financial regulation Some positive developments But still problems with microprudential regulation And also macroprudential regulation The “boundary problem” and “whack a mole” Financial stability is not yet assured Presentation: The 2008 Global Financial Crisis in Retrospect Presentation: What is Macroprudential Policy Not?

Crisis prevention: policies at cross purposes Monetary and regulatory: accelerator and brake Monetary and fiscal: accelerator and brake A false faith in monetary policy By those who desperately wish to believe Publications: William White Comments on a Paper by Malcolm Knight

A serious downturn seems inevitable Moderate slowdown will reveal debt problems Economic pickup will trigger the debt trap Financial overshoots also possible Trump policies exacerbate existing risks A worse downturn than 2008? Media: Project Syndicate September 18, 2018

Crisis management will be difficult Domestic constraints on monetary easing Domestic constraints on fiscal easing Domestic constraints on liquidity support Political constraints on international coordination And potentially even on Fed “swaps” Media: FAZ December, 2018 Media: A Global Dollar Shortage? September, 2018

The case for crisis resolution Kicking the “debt can” down the road was problematic from the start And has become increasingly difficult Orderly debt restructuring is better than Debt-Deflation And has political advantages as well Media: Financial Times April 18, 2018

Impediments to restructuring in the private sector No one wants to hear “the money is gone” Particularly if there is a moral dimension Inadequate restructuring procedures for non financial sector Other impediments to dealing with bad loans in the financial sector “Too big to fail” and “too big to save” remain big issues

Impediments to public sector restructuring No one wants to say “the money is gone” The bank/sovereign nexus problem No agreed criteria for the need to restructure No international treaties to force action The myth of central bank debt forgiveness of sovereign debt

Policy reactions to deepening disorder The attraction of post War “financial repression” But can it work in the modern world? The attraction of “helicopter money” But could it end in high or even hyper-inflation? Media: FAZ December, 2018

A concluding comment We are at a dangerous juncture Orderly debt restructuring beats the alternatives If Plan A (hoping for the best) is not a viable strategy We should be preparing Plan B