William White: 'It's 2003 All Over Again'

In today's commentary at Bloomberg, Caroline Baum consults with former Bank of International Settlements chief William White on the similarities between today's liquidity-fueled ascent of asset prices and the last time something like this happened.

Yes, that would be the same 2005 era "Chicken Little", Austrian-leaning William White whom, after the financial market meltdown last year, people started listening to instead of higher profile retired economists as noted here a few months back.
It's funny how dramatically reputations can rise and fall based on financial market developments and prospects for the future, a future that it now seems clear will not have ordinary Americans wealthy beyond their wildest dreams simply because they owned a piece of real estate.

Anyway, here's Caroline:

Imagine you are a central banker. You arrive at the office each morning and scan the daily financial pages and newswires. You read that markets -- stocks, junk bonds, gold, oil -- are positively giddy due to “all the liquidity sloshing around that has to go somewhere,” or something to that effect.

That would be the liquidity you created.

You may be starting to feel pangs of anxiety before you’ve had that first cup of coffee. You know from your crash course in economic-survival medicine that cleaning up after a burst asset bubble isn’t as easy as it sounds. If you learned anything over the last two decades, it’s that today’s palliative can become tomorrow’s poison, that treating busts with prolonged periods of easy money leads to bigger bubbles, and that an ounce of prevention may prove to be the best cure.

So what’s a policy maker to do? The U.S. economy is still facing major obstacles to sustained growth, credit isn’t flowing to sectors and businesses that need it, and the financial system is far from self-supporting.

Surely there’s a better way than orchestrating alternating periods of asset bubbles and busts.

“It’s 2003 all over again,” says William White, chairman of the Economic Development and Review Committee at the Organization for Economic Co-Operation and Development in Paris.

White was referring to the “inflection point” in 2003 when, following an extended period of ultra-low interest rates - - 1 percent in the U.S., 2 percent in Europe, close to 0 percent in Japan -- monetary stimulus ignited a rally in asset prices, the mother of all housing bubbles and a crisis that brought the financial system close to the brink of collapse.

It’s very tempting to do what’s worked before, even if it makes things worse in the long run, White says. “We’re at the end of the road we embarked on in 1987, if not before, relying on credit bubbles, associated increases in asset prices and unwise spending every time there was a problem.”

Lowering interest rates, expanding the federal deficit: It may work in the short run but in the long run (yes, we’re all dead, but our children aren’t) it creates a mountain of debt and a lot of stuff no one needs or wants.

No central banker or government official is brave enough to look the public in the eye and speak the truth, especially when presenting two, unappealing options: Either we suffer through a long period of stagnation, with easy money and government spending cushioning the fallout, even at the risk of creating new imbalances; or we take our medicine in one large dose and suffer a shorter, more painful period of contraction and restructuring that wrings the excesses out of the system.

“It takes a very brave man if the choices are stagnation versus a painful adjustment,” White says. “I suspect there are no takers for the second one.”

No, probably not.

Comments

[nym:]

Because any taker of the second option could not be re-elected. The voters will go with extend and pretend, as the Japanese have for nearly 20 years.

Nov 12 03:02 PM

[derryl:]

Richard Koo explains that Japan hasn't spent the past 15 years in a "lost decade". The Japanese private sector has been paying down debts accumulated during Japan's bubble and the Japanese government has been borrowing and spending Japan's savings to prevent GDP from collapsing during the credit contraction that is necessary during a time of balance sheet repair. Prieur du Plessis recently linked to a talk Koo gave and it's worth watching.

seekingalpha.com/artic...

Koo keeps saying it would take the US "at least 5 years" to do a similar balance sheet repair, but it's pretty clear he means that realistically it will take the US 7-15 years to get out of this popped-bubble pit. The good news is that it can be done without having to go through a devastating Depression. The scary part is how high government debt will go.

I think Obama should ask Koo to come and explain to the American people, on TV, the choices that America faces. I think if people are told what's going on, rather than lying and trying to pretend everything's ok, it just might be possible to pull off a Japan rather than suffer Great Depression 2.0 and a world war to end it.

Nov 12 09:02 PM