22 February 2010

The eternal cycle of bubbles

Excerpts from a Mint interview with William White of BIS, now with the OECD:
From his perch as the former chief economist at the Bank of International Settlements in Switzerland—the “central bankers’ central bank”—he warned that central banks, his very clients, were dangerously creating too much credit. But up against US Federal Reserve chairman Alan Greenspan, the “Maestro” who had ensured years of stable growth, he sounded like a rabble-rouser. At the 2003 Fed symposium at Jackson Hole, Wyoming, White went against every grain of the zeitgeist, arguing that monetary policy could prick bubbles before they burst; Greenspan remained impassive.
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In his own words, RBI is a “full-service central bank”. That description resonates with the Canada-born White, in part because he served for 22 years at the Bank of Canada, another conservative central bank. “I was struck when I was listening to (Subbarao)…it reminded me of the Bank of Canada” which also calls itself “a full-service central bank”.
“When (Subbarao) says that you are where you are, and this is the way we have to behave, he’s right.” And in the real world where India’s economic constraints demand more of RBI, there’s no point in arguing with practicalities. Still, at the back of his mind, is he concerned about what a central bank’s mandate means for its independence?
That’s the elephant in the room: A central bank trying to do too much will inevitably bring it into conflict with political forces, as is already happening in the US. “You can get drawn into politically sensitive issues: You bailed out this guy because he’s your friend, you go to the same golf club… This is the kinda thing that happens,” White says. That invites scrutiny on central banks such as RBI, where monetary and regulatory policy—setting interest rates and overseeing banks—are two legs of the same stool.
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To White, though, the world needs to go through a painful “process of adjustment”. Cheap credit last decade created “false demands… So, you have many industries in the advanced countries which are too big. And they are going to have to get smaller,” a process that “is not going to be easy”. If eternal recurrence itself is so amazing a phenomenon, breaking out to attain nirvana sounds too mythical.

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