Now They Listen to William White

This story and associated slide show in Spiegel Online (hat tip Tailwind) about William White, former chief economist at the BIS (Bank for International Settlements), offers new hope that maybe, just maybe, the global economy will someday be put on a steadier course.

William White predicted the approaching financial crisis years before 2007's subprime meltdown. But central bankers preferred to listen to his great rival Alan Greenspan instead, with devastating consequences for the global economy.

Mr. White has been something of hero at this blog, his summer musings in the BIS annual report anxiously awaited year after year, then endlessly fawned over as should be clear from the list of previous posts below:

• May 18, 2006 - A Monetary Policy Double Standard
  
• Jun 29, 2006 - Catch the Swamp Fever!
  
• Jun 26, 2007 - Austrian economics in the WSJ
  
• Jul 01, 2008 - BIS Chief Economist William White channels his inner-Austrian
  
• Dec 11, 2008 - William White: "The facts are so obvious"
  
• Apr 01, 2009 - White vs. Greenspan - No Contest
  

It's nice to see that others are now listening...

This is a quite lengthy article, well worth reading in its entirety. Here's the best part:

White recognized the brewing disaster. The analysis department at the BIS has a collection of data from every bank around the globe, considered the most impressive in the world. It enabled the economists working in this nerve center of high finance to look on, practically in real time, as a poisonous concoction began to brew in the international financial system.

White and his team of experts observed the real estate bubble developing in the United States. They criticized the increasingly impenetrable securitization business, vehemently pointed out the perils of risky loans and provided evidence of the lack of credibility of the rating agencies. In their view, the reason for the lack of restraint in the financial markets was that there was simply too much cheap money available on the market. To give all this money somewhere to go, investment bankers invented new financial products that were increasingly sophisticated, imaginative -- and hazardous.

As far back as 2003, White implored central bankers to rethink their strategies, noting that instability in the financial markets had triggered inflation, the "villain" in the global economy. "One hopes that it will not require a disorderly unwinding of current excesses to prove convincingly that we have indeed been on a dangerous path," White wrote in 2006.

In the restrained world of central bankers, it would have been difficult for White to express himself more clearly.

Now White has been proved right -- to an almost apocalyptical degree. And yet gloating is the last thing on his mind. He, the chief economist at the central bank for central banks, predicted the disaster, and yet not even his own clientele was willing to believe him. It was probably the biggest failure of the world's central bankers since the founding of the BIS in 1930. They knew everything and did nothing. Their gigantic machinery of analysis kept spitting out new scenarios of doom, but they might as well have been transmitted directly into space.

For years, the regulators of the global money supply ignored the advice of their top experts, probably because it would require them to do something unheard of, namely embark on a fundamental change in direction.

The prevailing model was banal: no inflation, no problem. But White wanted central bankers to take things a step further by preventing the development of bubbles and taking corrective action. He believed that interest rates ought to be raised in good times, even when there is no risk of inflation. This, he argued, counteracts bubbles and makes it possible to lower interest rates in bad times. He also advised the banks to beef up their reserves during a recovery so that they would be in a position to lend money in a downturn.

If White's model had been applied, it might have been possible to avoid the collapse of the financial system -- or at least soften the fall. But there was simply no support for his ideas in the singular, and highly secretive, world of central bankers.

They were all too busy patting each other on the back, apparently, after wholeheartedly endorsing all of the mid-decade "financial innovation" that had produced the closest thing Mankind has ever seen to an economic and financial market utopia.

That utopia didn't last very long...

ooo

This week's cartoon from The Economist:

Comments

[Roger Knights:]

I hereby dub Greenspan as "Mr. Greenspin" and today's bull-shooters as "greenspinners."

Jul 13 06:49 AM

[Mark Bern:]

Good article! It becomes more and more apparent that the Fed and Central Banks around the globe, with their regulatory and monetary powers, had the tools to avert (or at least lessen the severity of) the financial crisis through which we suffer today. Had they acted to moderate growth in a timely fashion, we would not have had the bubble in real estate nor the need to create such complex derivative investment vehicles.

But I still believe that Congress, having loosened the rules and encouraged subprime lending, should share the blame.

That said, I think that it is high time that the rules governing Central Banks, and especially our own Fed, be restructured to provide oversight and accountability. If they won't listen to the head of the BIC voluntarily, there needs to be some set of standards to which they can be held to ensure greater safety of public interests at large.

Jul 13 08:58 AM

[TeresaE:]

Even Mr. White, with his warnings and predictions (understandably ignored, when you have caviar on your table you cannot believe their will be a day when you are forced to eat tuna), still underestimates one thing that is prevalent in both Europe and the US.

Off shoring of good paying jobs for the masses and importation of cheaper foreign labor.

We, the Western World, have intentionally traded our wealth production (manufacturing) for paper jobs.

Now what?

Jul 13 10:09 AM

[yellowhoard:]

Let's face it.

The world's bankers were having the biggest orgy since Caligula.

Mr. White was about as welcome as a "Dangers of STD's" video.

Jul 13 10:21 AM

[derryl:]

In the piece Tim quotes William White also said it is easy to see bubbles forming and stop them, contrary to Alan Greenspan's 'invisible bubble' claims. White says central banks should monitor credit expansion and asset prices because this is how bubbles form. We recently saw the Chinese markets spike as Chinese banks obeyed the order to lend, and lots of that freshly released cash was used to buy stocks.

Too much new money too fast is not put to productive uses. It doesn't matter if it's gov't money to stimulate infrastructure (bridges to nowhere) or banks making mortgages ($600k bungalows). As Mr. White implies about monetary and economic growth, slow is steady and fast is hazardous.

Jul 13 11:47 PM