Free Trial

MNI INTERVIEW: Ex-BIS White: Cenbank Prices Fixation Misguided

By Greg Quinn
     TORONTO(MNI) - Central banks should rethink their focus on near-term price
stability, former Bank for International Settlements Chief Economist Bill White
told MNI, arguing that ultra-low rates may help bring on the next crash.
     Most economies have gone through healthy periods where rising supply held
down prices and boosted purchasing power, White said in an interview in Toronto.
Low rates will also give policy makers less power to cope with the correction
from the build-up of low quality debt and surging equity markets he believes
could occur within the next two years.
     "The idea that somehow inflation is always and everywhere the problem, it's
just not true," he said. "Price stability and we have to have it -- and if we
don't have it it's a disaster and if we do have it everything's okay -- these
things are just patently untrue.
     "The only example that you can point to where that kind of cumulative
downward process seemed to happen was the 1930s, the Great Depression, and that
prior to that there were all sorts of examples where prices were going down,
even in aggregate, and growth was proceeding very strongly."
     The Fed and ECB are reviewing toolkits with little sign they want to
overhaul regimes aiming at keeping inflation around 2%, while continuing
policies that fail to meet even that target.
     "It's pulling out all the stops that led to interest rates ratcheting down
to zero and all the unintended consequences," said White, who was also chairman
of the Economic and Development Review Committee at the Organisation for
Economic Co-operation and Development from 2009 to 2018. Central bankers have
over-reacted to a disinflationary cycle in place since the 1980s driven by
increased production from China and Eastern Europe and labor from the Baby Boom
     Warning signs include a surge in emerging market debt, geopolitical fights
with China, and a pile of U.S. corporate bonds one notch away from junk status.
Yield curves have inverted while stock markets rally.
     "Both of them can't be right here, and my betting would be that the bond
markets have probably got it more right than the equity markets," White said.
     The weakness of central banks' extraordinary tools is evident in the
sluggish expansion and signs business confidence is waning, he said.
     "There is a reasonable chance, perhaps a very reasonable chance, that
things will come unstuck sometime in the course of the next year or two," White
said. "The thing I worry about in a way is a repeat of 2009."
     But negative rates and QE may be even less effective next time.
     "It's a dangerous delusion to think that it will work without making things
even worse," he said. "At the same time as we have less ammunition, we face
bigger headwinds of private debt overhang ... Monetary policy has sort of shot
itself in the foot."
     There are positive lessons from the experience of the financial crisis.
Governments should remember growth sputtered after they yanked fiscal stimulus
in 2010 and they have more room now to help than central banks, he said.
     "It would be better to have fiscal easing at this point ... there is more
room," White said, although he noted that there are still limits to government
deficits and debt, which he said have been downplayed by proponents of Modern
Monetary Theory.
     The crisis was a reminder that economies and markets are more like a
complex and unpredictable ecosystem rather than a machine to be controlled.
While regulators need lines of responsibility made clear in advance and have
wide powers to take on problems, they shouldn't fight every fire, he said.
     "Don't fight the last war," he said. "Little breakdowns can actually be
great for you, they clean out the undergrowth and avoid really bad outcomes," he
     "We shouldn't really try to control the economy the way that we have done,
which is leaning so vigorously against every little downturn."
--MNI London Bureau; +44 203 865 3829; email:
[TOPICS: MMUFE$,M$U$$$,M$X$$$,MT$$$$,MX$$$$,M$$EC$]

To read the full story



MNI is the leading provider

of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.

Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.