MNI INTERVIEW: Coordinated Fiscal Must End Panic: Ex-BIS King

--Supply Chain Crisis Hurt by Leaderless Global Economy

By Greg Quinn

     OTTAWA (MNI) - Uncertainty over the effect of damaged supply chains is

making it more difficult for policy makers to respond effectively to the

coronavirus outbreak, a former BIS and Bank of Canada official told MNI, calling

for coordinated fiscal support to keep consumers and businesses spending.

     "There is always something new and difficult whenever there is a crisis, in

this case it's the global supply chains," said Michael King, a University of

Victoria professor who earlier worked at the Bank for International Settlements

and was a principal researcher in the Bank of Canada markets branch. "People

simply can't get their heads around what is the impact going to be, what are the

knock-on effects, because there are new connections that have been built into

the global economy in the last decade that aren't well understood."

     Central banks are limited in their capacity to address this type of shock,

and markets' rejection of unilateral government actions is echoing the early

response to the 2008 financial crisis before there was a common resolve, he

said. Global institutions have been weakened by personnel turnover and U.S.

President Donald Trump's foreign policy, King added.

     He noted recent staff changes at the IMF and ECB and pointed to relative

silence from the Financial Stability Board.

     --FISCAL COORDINATION

     "The central banks are willing to help but it's not enough to turn around

market and consumer confidence," he said. "It takes concerted fiscal action, and

it could take the form of somehow putting money back in the hands of consumers,

but also giving the impression that policy makers are coordinated and will do

whatever it takes to stop this panic."

     He did not want to provide any estimate of how big such fiscal packages

should be. But Jeremy Kronick, associate research director at the C.D. Howe

Institute and ,a former BOC researcher, told MNI that Canada and other nations

could offer fiscal stimulus around 1% of GDP targeted at business credit, wage

and jobless benefits.

     "We need a coordinated effort like we had in '08" said Kronick, "The bulk

of the problem is on the supply side."

     Investors are aware that central banks in major economies lack have the

policy space to boost growth with rate cuts, and the focus of the problem is in

the real economy rather than financial plumbing, King said.

     "A downward spiral begins when people overreact and cut back on spending

and this is what monetary policy is trying to prevent, because companies will

then slow production, they may lay off workers, they spend less and you get into

a downward spiral," King said. "That's why we need coordinated fiscal policy to

pick up the slack."

     The Organisation for Economic Cooperation and Development has said global

output may contract in the first quarter and called for coordinated stimulus.

China's share of GDP has doubled since the 2003 SARS outbreak to more than 16%

of global output, increasing the spillover effects of the virus outbreak,

according to the Paris-based group.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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