It's been a fantastic 24 hours,
but we have the main event now.
And I wouldn't normally
have to say anything other
than how could I have--
I think-- who doesn't know
these people sitting here.
But this particular
panel is being broadcast
and, additionally,
over at Yahoo,
over-- who knows how many
people are going to see it?
And so in that spirit, I feel
a certain compelling need
to introduce the four of you.
We have here on this event
of the 10th Review, the three
heads-- or chairman
and president,
whatever-- of the three major
central banks who were there
at the time of the crisis.
We have in the first row,
Jean-Claude Trichet, ECB,
Mervyn King, Bank of England,
and Ben Bernanke, our Federal
Reserve.
Now, you notice there's
a fourth person up there.
He's also a Central Banker,
but he's a very special one.
As one of the people who
put this session together,
one of the questions we had--
I shouldn't tell you guys--
what are we going
to-- who's going
to be able to control these
three people on a panel?
And we all looked and we said,
we know who, Stan Fischer.
Now, in addition to
being the Central Banker,
he was the Bank of
Israel during the crisis.
Stan is also Ben
Bernanke's thesis advisor,
at least he signed his thesis.
OK.
And, of course, Mervyn
spent time at MIT, as well.
And Jean-Claude,
you did in spirit.
OK.
So Stan Fischer
is the moderator,
and he's the one who I
have great confidence
will, if needed, make sure that
this is the best we can get.
So I won't take any more
of this precious time.
But to say let's welcome
them to the panel,
and it's going to
be really exciting.
Thank you all for coming.
This is a historic event in the
sense it's being videotaped.
Those of you-- all of you
were at one time students.
Imagine if you were a student
50 or 100 years from now,
and you're reading about
the crisis as part of this,
and you can actually
turn on a video
and see what went
on this afternoon.
Anyway, thank you very much.
Let's welcome them.
[APPLAUSE]
Well, thanks very much.
And Bob forgot to mention
that when we were students,
we shared an office.
So there's a lot of slightly
illegal relationships going on
around here.
It's an extraordinary group
that we have for our panel.
And since there is no
basis of choosing fairly,
I'm just going to go
with the alphabet,
and we'll call on Ben Bernanke
first, then Mervyn King,
and then Jean-Claude Trichet.
And you'll have about
eight to 10 minutes
for your first intervention.
And the question for the
first intervention is--
well, I have to do this.
There's a cartoon that I love,
I've loved since the 1960s.
It's a cartoon of [INAUDIBLE]
of Richard Nixon sitting
on his porch in a rocking
chair and being asked
by a journalist, Mr. President,
if you could do it differently,
what would you change?
And the answer was, next
time, no more Mr. Nice Guy.
So the question for Ben,
Mervyn, and Jean-Claude is,
what have you learned
from your experience
as the head of one of
the great central banks?
And what would
you do differently
if you faced a similar
challenge today?
Ben?
Stan was my thesis
advisor, so he's once again
offering an exam question.
I can-- I wanted to talk
about the crisis as a panic.
I want to distinguish between
a financial crisis, which
is any big shock to the
financial system, a stock
market crash, a collapse of the
exchange rate, sovereign bond
default, versus
a panic, which is
a generalized run on
intermediaries that do maturity
transformation,
short-term borrowing
to finance credit extension.
So a panic is a very
specific type of crisis.
And what I'd like
to leave you with
is my judgment that in the
United States, at least,
the panic was the
most important thing.
And this is, I think,
pretty consistent with what
Doug Diamond was
saying this morning.
So in what sense was the panic
the most important thing?
First, in terms of our
ability, or lack of ability,
to forecast the
crisis, you know,
going back, obviously, we saw--
people say, well, how could
you not see the housing bubble?
Well, we saw house prices.
We saw that the house
prices were very high
relative to rents.
We understood that part.
I think our hope was that
that would correct in a more
gradual way over time.
But that was certainly
something we saw.
We saw the risk premia that
Raghu Rajan was talking about.
Alan Greenspan, in one of
his valedictory speeches,
talked about the low risk premia
and the costs that can entail--
can be entailed by
low risk premia.
What we didn't see
was the vulnerability
of the modern complex securities
based financial system
to a run, to a panic.
But, in fact, of
course, we saw--
in the crisis, we saw the run on
asset backed commercial paper,
we saw a run on money market
funds, we saw collateral runs,
we saw repo runs.
So it was really
quite generalized.
And I think the
conceptual problem
there was that in
almost all these cases,
the short-term liability
that was being run
was collateralized.
So take repo, for example,
it's collateralized
in that it's backed by generally
pretty liquid securities.
So our view was
that it was unlikely
that we would see runs in
those collateralized markets.
Nevertheless, it turned out
that as the crisis worsened,
and as lenders became
worried about the liquidity
of secondary markets
and their own ability
to dispose of financial assets
in a timely and efficient way,
the easiest thing for
them to do was to run.
And we saw, again, runs
throughout the system.
So, again, I think the thing
that we didn't see coming
was the extent of
run vulnerability
throughout the modern
financial system.
And, again, I would support
what Doug Diamond was saying
and Gary Gorton has said
is that in the crisis,
look for the
short-term liabilities,
look for where the
run potential is.
So that-- that's the first
way in which the panic was
the most important thing.
The second one was in the
effects on the economy.
So the great financial
crisis was followed
by the great recession.
There was an obvious
causal relationship there.
The crises, certainly,
a major contributor
to the very serious recession
we had in the United States
and elsewhere.
And there's been some
debate about what
was the main mechanism.
For example, I mean, some--
certainly, some of the effect
just came from the unwind of
the housing bubble, the fact
that wealth effects of declining
house prices, for example.
But I would argue,
and I'll give you
two pieces of
evidence in a moment.
I would argue that
without the panic,
without the pervasive
panic, we would not
have had nearly so bad a
economic outcome as we did.
I'll give you two
pieces of evidence.
The first one has to do
with the forecast being
made by standard macro
models before the crisis.
Don Kohn and Brian Sack have a
nice paper on monetary policy
during the crisis.
And they show some
simulations in real time
that were done by
the Fed staff, and--
included in the
green book, which
is The Briefing Book
that goes to all
the members of the Federal
Open Market Committee.
And what they showed
is that even as
late as October of 2008,
after the failure of Lehman,
even in scenarios which assume
declines in house prices
that were as large or larger
than what would actually
happen, the macro
models couldn't sustain
an unemployment rate above 7%.
And I had a similar
experience, by the way,
when I was the Council
of Economic Advisers
Chairman for President Bush.
And he asked us-- we were--
we wanted to show
him what would be
the implications of a
30% drop in house prices
without a financial crisis?
And we found, you know, a
recession, but a modest one.
So the house price
decline was not by itself
sufficient to generate the
kind of recession that we saw.
The other piece of evidence
is right from my own research.
I just presented a paper
at Brookings in September
on the linkage between the
crisis and the economy.
And what I found was that
indicators of the panic,
such as the spread
between the LIBOR rate
and the short-term interest
rate, the OIS rate,
were much better forecasters
of the real economy
than were things
like house prices.
And, essentially, what I'm
saying here is that if you--
that-- that the
timing of the crisis
was tied very closely
to the downturn.
So, obviously, the worst of
the decline in the economy
was in the fall of 2008
after Lehman and AIG.
And the economy began
to recover in 2009,
after the panic was controlled.
The third point I would make is
that because the panic was so
central, certainly the US case.
And I'm sure Jean-Claude will
talk about the sovereign debt
crisis in Europe and look
somewhat different situation.
But because it was
so central in the US,
I think that we have to evaluate
the regulatory changes that
have been undertaken since
then in terms-- at least
in part-- in terms
of how they guard us
against a future panic.
And I think, very
briefly, and we'll--
I'm sure we'll get in
more of this more--
I think that in terms of
reducing the risk of a panic
occurring, reducing the
vulnerability of the system,
I think we've made
a lot of progress.
Andrew Metrick, for
example, and Rob Engel,
showed some indicators
that suggests
that those kinds
of risks are lower.
Certainly, the shadow banking--
pardon me.
The shadow banking
sector is smaller.
The amount of reliance on
short-term funding is down.
All those things
are encouraging.
More capital, less leverage.
I think, though, where
I remain concerned
is in terms of the
firefighting tools.
And I understand Tim Geithner
talked about this yesterday.
And talking specifically
about Central Banks,
I think that the
lender of last resort
tools, particularly, at the Fed.
And this is, I think,
less the case in--
I would-- Mervyn and
Jean-Claude can comment.
I think this is less the case
outside the United States.
But in the United States,
the lending tools,
the lender of last resort,
authorities of the Fed,
were constrained by--
after the crisis,
and I fear that they
are not fully adequate.
I do have-- I am fairly
encouraged by some
of the developments in
terms of the resolution
authority, the liquidation
authority, which
I think will be very helpful.
But the normal lender
of last resort activity
that the Fed undertook in the
crisis has been constrained.
And I will talk about that more.
But I worry about that.
So that's-- so that's
my perspective,
that the panic was very
central and, therefore,
that conditions to some
extent what we did.
Obviously, we were late
in an understanding
that this was going to happen.
It took us a while in 2007 to
see the extent of the panic.
Once we understood
what it was, we
reacted aggressively with
lending and, ultimately,
with capital and guarantees
to help stabilize the system.
I think we were successful
in stabilizing the system.
I think that just to throw this
out there as a conversation
thing in terms of the politics
and the communication,
you know, there's--
clearly what we did
was very unpopular.
Was that because of inadequate
communication on our part?
Was it because our political
system was just not
set up in a way to appropriately
address these issues?
Would it have been better if
we'd had more pieces already
in place before the crisis?
That's what I actually think.
I think that if
we'd had something
more like an FDIC for the
shadow banking sector,
we would have been much
better placed, both
economically and politically.
But, again, if I
want to think back
about where there could have
been differences in terms
of the response after
the crisis began,
I think the communication
and the politics
was certainly a much
bigger part of it, also,
than I initially understood.
But I certainly quickly
became to appreciate that.
Thanks very much, Ben.
Mervyn, speaking from the
mother of Central Banks.
Well, I share Ben's view
that the essence of this
was a run on short-term
debt liabilities.
And that the impact
on the real economy
derived from the
existence of the run.
And not just within
a country, I think
there was a global downturn,
and it reflected, really,
a change in narrative
about how much
confidence one could
place in the US
and, therefore, by extension
other financial systems.
But for me, there were
three main lessons.
And I think the
question I'd want
to add to Ben's two main
points is, why was there
a run in the first place?
So for me, the first lesson
was that the banking system
was under capitalized.
The second lesson was that the
lender of last resort framework
that we thought we
inherited from the past
to extend emergency
liquidity was
inadequate to cope with
a modern banking system.
And the third lesson is
about the politics of how
to deal with these problems.
So on the first one, I think,
certainly, at the bank,
we felt pretty early
on, by December 2007,
January 2008, that the loc--
loss of confidence which
markets showed in
the banking system
as reflected in the waxing
and waning of the liberal OIS
spread, was never
going to be dealt
with satisfactorily without a
recapitalization of the banking
system.
And, indeed, when the banking
system was recapitalized,
confidence in the banking
system, as such, was restored.
So I think that was a
very important point.
Now, the difficulty,
of course, with that
is that there is no
objective measure
of the amount of capital
that you need in order
to gain confidence in
the rest of the system
to be willing to lend to banks.
Before the crisis,
we know people
were willing to lend to banks
at very high leverage ratios.
And once the crisis had
hit, almost no amount
of equity capital would have
sufficed to restore confidence.
So capital requirements
are a bit of a rough tool.
They're important, but there's
no objective measure, I think,
on how much you need
to put in place.
But the system was
undercapitalized relative
to expectations at the time.
The second issue on liquidity
and lender of last resort,
we all knew budgets, dictum,
lend freely at a penalty
rate against good collateral.
But all three aspects
of that failed in 2008.
The first one, lend freely,
failed because of stigma.
And I think we were not
conscious of how important that
was.
We should have been,
because I think
the 1914 episode, beginning
of the First World War
major financial crisis,
somewhat overshadowed
by the actual first
World War itself.
But, nevertheless, it was
a big financial crisis
in which in the run up to
it, stigma had played a role.
And that was rather forgotten.
And I remember, I
think it was you, Stan,
who brought back to my
mind the words of one
of my 19th century predecessors
in coping with a crisis, which
was, "We lent, we
lent a great deal,
and we were not
over nice about it."
In other words, you really
had to force the liquidity
onto the banks to make
sure they would take it.
And stigma was a big problem
in designing facilities.
And we heard about
the facilities
which the Fed invented.
All of us were
creating facilities
to get around the
problem of stigma.
The penalty rate failed because
it was time inconsistent
that the-- you know, it's
fine to say in advance you're
going to impose a penalty rate.
When you actually get to the
crisis, banks need the money,
there's not much incentive
to impose the penalty rates.
And the third one
against good collateral
failed because there
wasn't any good collateral.
I remember when Royal
Bank of Scotland failed,
they rang up in the
morning and said,
we can't get to
the end of the day.
And I wrote out a check
for 36 billion pounds.
At the end of the day
I said to my staff,
so what's the collateral
we've taken against this loan?
And they said, oh,
it's mortgages.
I said, yes, yes.
And whose mortgages?
No idea.
And the fact was that
banks had run down,
the moral hazard
had kicked in, they
had run down their liquid
assets virtually to nothing,
and we were lending against
highly illiquid collateral.
So that framework didn't work.
And I think we do need
to redesign an ex ante
framework where the
politicians sign off
and give authority to the
Central Bank in advance
to conduct a lender of
last resort operation.
That's understood.
They don't have to sign off
on the particular actions that
are taken.
They can hold the
Fed, or everyone else,
accountable for those
actions ex post.
But there has to be
an agreed framework.
And I think it also has
to be one in which we
put in place some ability
to ensure that there
will be sufficient collateral.
In my book, I talked about
the scheme, Pawnbroker
for All Seasons.
I'm sure there are variants
on it I'm sure there
are better ways of doing it.
But some clear ex ante
framework, I think,
will be needed to do it.
And then, lastly,
on the politics,
I was very struck that
the crisis brought home
the observation that banking
is an industry that is closely
intertwined with politics.
The politics were toxic.
People didn't-- you know,
ordinary people didn't like
the fact that banks were being,
quote, bailed out, unquote.
We had not sold
to them in advance
the idea that this lender
of last resort provision
could be seen as an
insurance scheme,
because we'd not made the
banks pay the insurance premium
upfront.
That politicians were--
had definitely being--
whether the regulators
were captured by bankers
is a different question.
But, certainly, the politicians
were, without any question.
And when it came
to the realization
that the banks needed
recapitalizing,
the banks themselves were
the biggest obstacle to it.
They fought tooth
and nail to the end
to prevent a recapitalisation.
And the politicians
took the view,
we must get through
this crisis somehow,
but we've got to do it with
the agreement of the banks.
There was not sufficient
willingness to say,
this is a collective
problem, and our job is now
to impose this scheme on you.
So I-- and I--
you know, the hardest part of
the crisis without any doubt,
I would say, was it
was difficult coping
with the substance of the
run and devising schemes
to handle it.
But the worst part, the
most difficult part,
was actually trying to
deal with the politicians.
And maybe later we
can have a discussion
about the different
political setups.
Because Jean-Claude had, was
it 17 governments to deal with?
At least I only had one.
But everything that was done
where politicians had knowledge
of it somehow managed to be
leaked to the press, which
made actually conducting
many of these operations
extraordinarily difficult.
Thanks very much.
Moving on the word
pawnbroker, said it
a little quieter than the rest.
I'm sure it was not
intentional, but just--
Mervyn has written a book
called, The End of Alchemy,
or something.
Have I got that right?
Yes, The End of Alchemy.
The End of Alchemy on what
should be reformed in the--
in the British way of treating
crises, financial crises.
And he makes the role
of the Central Bank
to be the pawnbroker
for all seasons.
Because the agreements
about access
to future credit
from the Central Bank
are made before
any coming crisis.
But if you want to speak about
that in the second round,
Mervyn--
It would come out of it.
--people would like this.
Now, Jean-Claude, you
have the hardest task,
because you had to
deal with a crisis
with your central banking laws
not exactly complete and ready
to go.
And you had 17 members to
deal with, and so forth.
And I wasn't quite
sure how you did it.
And perhaps you can explain.
Again, I don't think
that the Central
Bank had a lack of tools or
instruments, frankly speaking.
And nobody is envisaging
to change the treaty
and to change the
statute of the bank.
But let me go back to
the start of the crisis.
What was very striking,
in my own understanding,
is that when we met
in Basel several years
before the crisis, and certainly
more than one year and two
years, say, before the crisis.
Even before the start
of the subprime crisis,
we were all convinced,
I have to say,
that the market was
underassessing the risk premia,
generally, and
assessing the-- if--
I meant the volume of the risk,
and the price of the risk.
And that was shared largely
by the banks themselves.
I have the memory of a
meeting we had, confidential,
with the banks at the end--
at the beginning of '07 where
clearly it was the conclusion,
and even one of the
banker was saying,
I know that what
we do is bizarre.
But when the music plays, I
cannot help but standing up
and--
You have to dance.
And it was that notable summing
up of the power of the market
when the market is going
in some direction that
appears not to be optimal, even
in the eyes of all the parties,
I think, at the highest
level of the participants.
Then we had the
emergence of what
I would call new properties
of global finance, US finance,
certainly, but global
finance, also, into--
in the era of IT, generalized
IT and globalization.
So the interconnectedness
between all segments
of the market, all
institutions, all economies,
was so large that
this run up, which
had happened in the
past several times
and we have a very
good academic research.
And that appeared to be very
easy to constitute, if I may,
the herd was forming up in a
second, in half day, one day.
And you could have changes
and contagion to an extent
that I have to say
we could not, frankly
speaking, foresee in
advance, as you said, Ben.
And I take it that it is
something which is still there.
We are still in this
interconnection,
and we have to
prepare, if we have
a trigger to this kind of--
I would say, behavior, that
is totally synchronized
like a laser in market
participants institutions
the world over, at least
in the advanced economy.
Because in our case, it was
very much limited at the start
to the advanced economy.
So what I observed myself was
at the time of the subprime, 9th
of August, 2007, because
of a generalized sentiment
in the world, that there was
a lack of dollar liquidity,
an immense desire
to borrow euros,
to swap them against dollar
at a time when the New York
market was not yet open.
And we had no market the
9th of August in Europe.
So we had to reflect
on what to do
when we had no func--
no market functioning.
Had we let the market not
functioning for one day,
I think it would have created
the sentiment that we were
totally losing control,
the ECB was totally
losing control, of everything.
So we decided, for
the first time,
to give liquidity on
an unlimited basis.
And we were asked $95 billion.
It was the sum of all the
requests by all the banks
that were eligible
to our refinancing.
We gave the $95 billion.
They didn't need $95
billion, of course,
but it was something which
was a shock, I have to say.
And then, of course, we
managed to diminish, diminish,
diminish, day after
day, because we had only
lend this liquidity for one day
without proper yet collateral,
at least collateral
which we trusted
eligible to our refinancing.
So that's one.
Then, of course, when we
had Lehman Brother the start
of this period,
absolutely dramatic.
Well, there was a grave and
immediate threat of collapse
of the financial system.
We also had to react
extraordinarily rapidly.
So what was absolutely
amazing was the contagion
which was going by the
half day, in comparison
with '29 I'm speaking,
about your control, Ben.
I think that you would
have had the time lags
totally different, much longer.
But there in-- as a question of
half days, not only in the US,
but in Europe, we had the
panic, you know, contagion--
contagious.
And we had to react also very,
very rapidly and swiftly.
And I will always
thank Ben, and I
think that we share that
view, for having accepted
that we had an
extension of the swap
with the Federal
Reserve in order
to cope with this dollar
liquidity, which was
the major problem at the time.
So my understanding, taking
into account those two examples,
was that we have to be
prepared in this new world
to cope with emerging
properties of that kind,
that we have experienced
in the last crisis,
but other that could be
experienced in next challenges.
And we have to be
fully aware that we
have to respond extremely
quick-- quickly and boldly.
Had we asked the
public authorities,
the executive
branches, to decide
on what the Central Bank should
have done at that time when
we were on the frontline
in Europe, or in the US,
or in the UK, it seems
to me that there would be
absolutely incapable to decide.
I am sure in my own
constituency it was too broad,
even the $95 billion I mentioned
in '07, they could not decide
something like that.
I mean, it was
absolutely impossible.
And we could see in
the US the difficulty
to get the top
program being voted
by the Congress,
which it was overdue,
that program was overdue.
But we could see that
the political sphere,
the political
elite, could not yet
understand how great it was.
So I would en passau say
that it is a good reason
to consider that independence
of the Central Bank
is very important, not only to
defend against the short-term,
I would say pressure coming
from the executive branch,
but in some cases,
also, to be able to cope
with new and
unpredicted events that
are extraordinarily dangerous.
Now, as you said,
Ben, I had not only
to cope with the private
sector drama of the--
of the crisis, the epicenter
of which was in Wall Street.
In our case, we had to cope also
with the sovereign risk crisis.
But let me only
say in concluding
on this crisis of
the private sector
that it was something
quite extraordinary
that we avoided any
bankruptcy in the Euro area,
of any systemic
financial institution.
I know by experience
that it was not easy.
We had at the time, immediately,
15 countries concerned,
then 16 countries concerned.
And all of them had to go
through their own democratic
process to see
whether or not it was
appropriate for the taxpayer
risk to be put on the table.
And I have had
myself to convince
a number of executive
branches that, yes, indeed, we
could not afford a new
bankruptcy, Lehman Brother
type, in Europe.
But, again, we
succeeded, and I think
it has to be put to the
credit of the system,
of the very exceptional and--
and, I would say, the
system of the executive
branches having
to respond to more
or less the same
challenge, and responding
in avoiding the catastrophe.
And, of course,
the catastrophe was
that the executive branches,
we are challenged again,
by the sovereign risk crisis.
I don't know whether you
give me a little time
to speak on this--
We're going to do
a second round--
OK.
Fine.
--so you'll-- it'll
probably be there for you.
The-- one of the most
interesting aspects
of this crisis, in
historical terms,
was the unbelievable speed
of transmission to Asia.
And within two months, I think,
exports and some of the leading
exporters were down by 50%.
Which for export
rich economies was--
it was very powerful
and very difficult
for them to deal with.
What was it that caused
this incredible speed
of transmission?
And I'm going to go
start down the row, one
further down the row each time.
Mervyn, you start.
Jean-Claude, you're next.
Ben, you're the one after.
So I was very
struck in the crisis
that our Central Bank
colleagues from not just
Asia, but also Latin
America, would ring up
and basically say, we-- you
know, we haven't had a banking
crisis in our country.
But, nevertheless, we're
seeing a dramatic drop
off a cliff in
domestic spending.
Why is this happening?
And I put this down to the
fact that as Jean-Claude said,
and Ben, too, before
the crisis, we
knew we were in an
unsustainable position.
Somebody had to give.
What we didn't know was
what and when we give.
We had some long
discussions at the IMF
about whether the US
dollar would fall sharply
as a means of correcting it.
And deep down, we've been
going through a period
of a-- a long period of
just continually falling
long-term real interest rates
and compressed risk premia.
None of this looked to
be remotely sustainable.
And there was a narrative out
there which, in many countries,
was, you know, the good
times have been rolling,
we can go on spending.
When the news about the enormous
financial crisis, the panic,
in the heart of the world's
financial system in New York
hit the world, I think
people said, gosh,
if it can happen there,
it can happen anywhere.
And maybe we, too, ought to
be deeply shocked and worried
by what is going on.
I think there was a
big change in narrative
that people were using
to persuade themselves
of how they should think
about their spending,
and planning, and
making investment.
And there was a very big change.
And I think that's
supported by the fact
that once you go just six--
really, six to nine months
down the road after that,
in most of the emerging
market countries,
people realize,
well, actually, they
haven't had a banking crisis,
they weren't so badly affected.
It was the emerging market
part of the world that was--
started to lead the world
economy out of recession.
Jean-Claude.
And your other topic, if you--
Yeah.
My understanding is that,
as Mervyn said, the emerging
world in whatever
continent they were,
had had before their own crisis.
So Latin America crises,
the African crises,
the Asian crisis.
And they were-- obviously,
we have to recognize that--
in a much better
macroeconomic and macro
financial situation
than we were.
Because we had no
such crises, and we
had not to adjust ourselves.
I have experienced myself the
adjustment in many emerging
countries as chairman
of the Paris Club,
and it's been really
an enormous effort
that they did to survive and
surmount these dramatic crises.
So it was a little
bit humiliating,
by the way, for the
advanced economy
to be the epicenter of
the last crisis that
happened before in, practically,
all continent in emerging
economies.
Of course, the
advanced economies
have an immense influence
on the global economy,
on global finance.
Of course, they are the
heart, as you said, Mervyn,
of global finance
and economically
on the rest of the world.
The fact that a large
deal of any investment
in our own countries
was interrupted because
of the uncertainty
of the situation,
and the fact that
everybody was trying
to be as liquid as possible,
as noninvested as possible
everywhere, created
for China, as you
said, and for the
rest of the world,
of course, an immense,
immense impact, negative.
Which the channel of it--
of which was really going
through trade and investment,
in my understanding,
and not necessarily
through the domestic
banks and domestic markets
that resisted quite well
in the circumstances.
I conclude in saying
that for us, I
would say the advanced economy,
it has been really dramatic.
Not only in our own countries,
because the confidence
that the--
our own fellow citizens,
our own people,
would have in the way
that we are managed has
been eroded, as it is clear.
But, also, the baton
was passed from the G7
to the G20, which was also
a symbolic evolution very
telling in terms of, I would
say, what the rest of the world
were thinking of the way we had
run all together the situation.
Thanks.
Be-- Ben, on the
rest of the world
and their role in the crisis,
I, being a Central Bank
Governor in Israel at
the time, was continually
getting phone
calls, can you help
us get swap lines from the Fed?
Sorry.
Which I thought was--
which I thought was
very bold of them,
but I wasn't certain that
I was the right address.
Can you tell us how
you thought about it
and how you deal with that
difficulty that people
feel, well, everybody
else gets it, why not us?
Well, I want to go
back just one step
and just say something about
this fundamental question
of how the crisis had the
big effect on the economy.
You hear this naive
comment sometimes, well,
how many firms in
a given quarter
are actually seeking new credit?
You know, and those are the ones
who are affected by this shock
to credit supply.
I think that's exactly the
wrong way to think about it.
I think what happened, as
Mervyn and Jean-Claude were
both indicating, is there
was this massive surge
of fear and
liquidity preference,
precautionary savings, the
desire to husband liquidity.
For example, firms that
didn't have any immediate need
for credit drew down
their credit lines as far
as they could just to have
as much cash as possible.
And so this created a tremendous
impact on the real economy
as firms, for example,
stopped hiring
because they wanted to conserve
the costs of employment.
So this had a global effect.
I had the same--
I had the same experience.
I had a visit to Brazil,
it was scheduled two weeks
after Lehman, and
they're saying,
we didn't have a
crisis, what happened?
All of a sudden,
the economy stopped.
And it was because everyone
went into this deep, deep fear.
And I-- and that's,
again, why I think
the panic was so critical.
Trade-- in particular, trade
is dominated by durable goods,
is traded--
there's a lot of trade credit.
So all those things
made it even worse.
But trade was absolutely
killed by the crisis.
Now, this question
about dollars,
I think if you're a serious
student of the crisis,
you need to understand that
the institutional frameworks
across countries were actually
quite different in many ways.
In one-- in some ways,
the Federal Reserve
was disadvantaged.
The Federal Reserve has the
most limited authorities
in terms of what it can
buy, who it can lend to.
I mean, we were severely
disadvantaged by the fact
that we needed to
invoke emergency
powers to lend to anybody
that wasn't a commercial bank.
Whereas, the ECB, you
know, could lend to any--
to any financial institution.
So in some ways, the
Fed was disadvantaged.
But in one way, it
was very asymmetric,
was that we were the
producers of dollars.
And as the work of
Gita Gopinath shows,
and many others, the dollar as--
particularly, in a
period of intense crises,
is the key currency.
And one of the first
things that we did in 2007
was to set up,
ultimately, 14 swap
lines with foreign
central banks,
essentially, making sure that
the foreign central banks had
access to dollars,
which they could then on
lend on their own credit risk,
to their domestic financial
institutions.
We felt that was essential
to stabilize dollar funding
markets and, therefore,
important for the US economy,
as well as for the
global economy.
There was a very difficult
political question about who
was to get these lines.
Obviously, the ECB, and
the Bank of England,
and the Bank of Japan, all
those major advanced economies--
Australia, and so
on-- were eligible,
and we worked with them.
For emerging
markets, it was tough
because we wanted-- you know,
there's political constraints.
We wanted to be sure
that we didn't take
any significant credit risk.
We wanted to make
sure that it was
going to be effective in
terms of market depth.
So we ended up
lending to doing swaps
with four emerging markets.
I think, Brazil, Mexico,
Singapore, and Korea,
I believe, were
the-- were the four.
They were based on
criteria of the extent
of their depth of their market,
their economic importance
to the United States.
We-- we dissuaded many others--
many other applicants, trying
to be conservative about it.
But, again, we did--
we did in the end lend
a large amount of money
through those channels.
And I think they were an
important way in which the Fed,
at least for a time, served
as the central banker
to the world.
And we felt that was
important, again, not
just for the global economy
but to create stability
in US money markets
that we needed, as well.
Can I add a sort of gloss--
Please do.
--on the switches?
It relates to something that
Paul Merton yesterday stressed,
which is trust.
And the one thing that became
very apparent in the crisis
was that the major
central banks,
we worked together closely
on a range of things
and meet each other,
have real trust
in each other, which does not
depend on formal agreements.
And here's the example.
September the 11th, 2001,
that evening and the next day,
the New York Fed
was in no position
to extend dollar liquidity
to the major British banks
operating in New York.
And we were in no position
to offer dollar liquidity
ourselves.
Alan Greenspan was
stuck in Europe.
He couldn't get back.
So Roger Ferguson,
who was number two,
was in charge of the
Fed in Washington.
And the convention
is that when you
deal with another
central bank, you
deal with your opposite number.
And for good reason,
because you know them.
So it wasn't Eddie
George who ran the Fed--
I was deputy governor
at the time--
was asked to ring
Roger Ferguson and say,
could we have a
swap line in dollars
so that you give us the dollars,
we can then lend dollars
to our banks in London,
which will tide them
over their dollar needs?
And we did that in a
telephone conversation
with no lawyers present in
the conversation whatsoever.
$30 billion swap.
We unwound it a couple
of weeks later on.
The only basis on which that
could have been done and worked
was personal trust.
And there are lots of examples
in the central banking
world where you see that.
It would not happen, I
think, between governments,
because the lawyers would
certainly be involved then.
But it reflected the flexibility
which central banks have
to do a job and do
what's necessary
when you've got a crisis
that no one had anticipated.
Jean-Claude?
Yeah.
We're done-- we're
done with that?
Now, the next question is--
and you'll start
off, Jean-Claude--
is what changes would you
like in the regulatory system?
I thought you would
ask me to say just one
word on the sovereign
risk questions.
Which was the--
That's fine, yes, please do.
Maybe trois.
Maybe-- maybe even two
words, Jean-Claude.
Two words.
But I respond first to
the question you asked.
It seems to me that we are
still in a very dangerous world,
obviously.
I take it, and I was very
impressed by the exposition
here, that what we
did for the banks,
in general, has been
quite well done.
Maybe Mervyn will find
that it is not sufficient.
But I really take it that a
lot has been done, anyway.
Still, there are part and parcel
of the global financial system
that seems to me still
dangerous, obviously.
The change of qualification
of the nonbanks or the shadow
banking, or whatever.
I am not talking with that.
What-- or what we said on
runs, on herd behavior,
is valid for markets,
as well as for banks.
And the two, of
course, are correlated.
I am not very, very [INAUDIBLE]
keen on the possibility
of having in this, you know,
space, very large space,
which augmented quite
considerably out of the banks,
that we could have
new challenges that
would be very dangerous.
Leverage has
continued to augment.
Public and private
leverage has continued
to augment after the crisis,
as it did before the crisis.
And if you add up public debt
outstanding, plus private debt
outstanding, as a
percentage of global GDP,
you see, and the IMF would
use the recently paper, which
was quite telling, suggesting
that this indicator had
augmented of something
like 25% of the global GDP,
plus 25% of global GDP, over
a period which goes for--
I'm speaking under
the IMF people there--
from the, perhaps, I would
say 2007, '08, up to 2016.
So more or less
after the crisis.
So this is something which
signals, not necessarily
in any particular country,
but at the global level,
that we are more vulnerable.
Now, two words on the
sovereign risk crisis.
We had, of course, the
contagion of the, I would say,
private sector crisis,
the epicenter of which
was in the US.
And we had the sad
observation and experience
that the epicenter was crossing
the Atlantic, as you told me
once, Ben, and that we had the
epicenter of the sovereign risk
crisis.
I said the epicenter
because some
signs we are given
that the market
participants, after having been
dramatically shocked by what
had happened in the private
sector, private signature
crisis, were, I would
say, very skeptical,
as regards all possible
signatures, including
the public signature.
Very fortunately, they consider
that all taken into account,
despite some kind of down--
downgrading of some
advanced economy signature,
nevertheless, they could
continue to trust them.
Unfortunately, in
the euro area, we
had at the beginning of the
sovereign euro crisis, three
of the worst signature in
the eyes of the market,
in the advanced
economy constituency.
Because we were advanced--
we are an advanced economy
grouping.
And by the way, we had, also,
more or less, the three best
signatures.
So the euro area was stretched
between its bad signature
of states and--
and treasuries, and
its good signature
of states and treasury.
I offer you that vision of
the euro area, because what
everybody has in
mind is that the euro
area had a dramatic crisis.
It is more complex than that.
All taken together, five
countries out of 19 today ,
had a dramatic crisis.
The others had not
a dramatic crisis.
And among the others, you
had the best signature
of the world.
So it's, also, a clue
to understand why
the euro called in this crisis.
Why the euro area
hold in this crisis?
You might know that
we were 15 countries
at the moment of Lehman
Brothers, including Greece.
The 15 are still there
and four new countries
got in so that we are
19 countries today
in the euro area,
which is, of course,
symbolically an illustration
of the resilience of the euro
itself, and of the euro area.
That being said, it was a
dramatic crisis, obviously.
And the Central
Bank did all what it
could to cope with this crisis.
I embarked myself on three
very important move, if I may.
One was the full
allotment at fixed rate
that we generalized the
15th of October, 2009,
in order to be sure that
absolutely all countries would
have all the liquidity they
needed through the banks.
And you know that the
commercial banks were financing
75% of the economy of the--
of the euro area.
75%.
In comparison with the
US, it was very, very high
in the US market more
as we are financing
75% of the US economy.
So we try to put, you
know, all our banks
in a position where they could
have all the liquidity they
would ask for.
Provided, of course, they
would have collateral.
And then, as you know, we
intervened on the markets.
I'm only mentioning
the important decisions
in purchasing treasuries for
Greece, Ireland, and Portugal,
in '10, and the treasuries
of Spain and Italy in '11.
And it was the two peaks of
the sovereign risk crisis.
And then, of course, I had--
I left, and my successor took
a number of other decisions.
But we had-- there-- and
it is another illustration
of the fact that
from time to time
you have to be prepared
for things that are not
necessarily expected,
and prepared also
to take decision very rapidly.
In both cases, the S&--
the S&P program that we
started, the decision
we have taken in a weekend.
We had to take the
decision in a weekend
not to let the run, the panic,
becoming totally systemic
in the system.
And we blocked the systemic
destabilization of the system.
We permitted those countries
to have access to financing
at a level of
interest rates, which
was more reasonable that
the very elevated spreads
that we are, I would say,
practice by the market.
You probably have a very
vivid memory of that
because you were in Frankfurt.
You came for a
colloquium immediately
after the first move, which--
which was striking everybody.
I'd have to say a lot of public
opinion, also, in Europe.
Thanks very much, Jean-Claude.
Mervyn, I sort of
wander around saying
we should have a
lender of last resort
facility like the British.
And they guarantee everybody,
somehow or the other.
Could you sort of issue--
say something more
exact than that, please?
Well, there are no
limits on the identity
of potential recipients of
Bank of England support.
We can lend to whomever we want,
either in the financial sector,
or outside it.
The only thing is that we
now have an agreed memorandum
of understanding between
the bank and the treasury,
on behalf of the
government, which
I signed with George
Osborne, which sets down
the fact that the treasury
has to give approval
to any specific lender
of last resort operation.
And I think that's sensible,
because in the end,
it's the treasury that is going
to underwrite the fiscal risk
of engaging in that.
And there have been a
lot of attempts over time
to say, well, we should maybe
raise the Bank of England
balance sheet so it can do
some lender of last resort
on its own account.
And my predecessor was
quite keen to have that.
But, actually, when
you look at it,
this is crazy because, frankly,
the limit that anyone is ever
going to agree for the
bank to do on its own
is so small that it
won't have any impact
in a systemic crisis.
So in any systemic crisis
where the lender of last resort
really matters, it's
inevitable, in my view,
that you have to
have a framework
in which the political
side of it gives agreement.
You can do it in
general terms ex ante,
or it can do it
by being involved
in the particular operations.
But in the end, they have
to give the indemnity
to the Central Bank for
carrying out an operation.
And the nature of it, as
I said, in the crisis,
we saw serious weaknesses.
When I remember, for example,
when we were first called upon
to act as a lender
of last resort,
I said, well, just
send down the files
on how we set the penalty rate.
Well, there weren't any files.
So in 24 hours, we
got some economists
and we put together
a pack of-- well,
it was in the back
of the envelope.
It was quite a large
number of pages.
But we actually
produced an argument,
produced a penalty rate.
But that was subject to
time and consistency.
In the end, what was the
point in imposing it?
So I think that the system
does need to be redesigned,
and it needs to be
redesigned something
along the lines of my proposal
in which you have to--
the-- the objective is to say
that maturity transformation,
whether it's in the formal
banking system or outside it,
is an important part
of the credit process.
We've not learned to
live without it, which
is why narrow banking is
certainly not a feasible
proposal at this stage.
But, nevertheless, if
there's too much maturity
transformation, then it can
cause the risk of a crisis.
And just as Ben said, it's
the crisis, the panic,
which can have enormously
costly economic repercussions.
So you want a positive
tax on the degree
of maturity transformation.
That means looking at both the
asset and the liability side
of the balance sheet together.
And one of the weaknesses
of Basel all the way through
has been that initially it
focused only on the asset side.
Interestingly, when
the Basel process
began in terms of
regulation, way back
when, long before I got anywhere
near the Bank of England,
the Bank of England did
propose that the Basel process
look at the liability
side of the balance sheet.
But that was dropped and
never taken further forward.
It's come back, but
it's separate regulation
for assets and liabilities.
I think it needs
to be integrated.
And you can see my
proposal, essentially,
as make banks pay
some kind of insurance
premium in the form of
prepositioning collateral
on which the Central
Bank sets the haircuts,
in order that they
would be automatically
eligible to borrow from the
Central Bank, sufficient money
to cover their
runnable liabilities.
And it's the runnable
liabilities that matter.
Which is why I have
never really understood
these wide definitions
of what apparently
used to be called shadow
banking, which includes lots
of institutions which
have very small degrees
of runnable liabilities.
We need to focus on the elements
that can generate a run.
That's the essence of it, and
that's what we don't have.
So if you-- in your very
beginning remark, Stan,
you said, well, what do we
wish we had done differently?
And I think as Ben
indicated, what
we would like to have done
differently refers almost
exclusively to things
before the crisis,
as we didn't have an ex
ante framework for this.
We didn't have enough capital
in the banking system.
We didn't have a
resolution process that
would deal with bigger banks.
Now, as Tim said yesterday,
I think a resolution process
is necessary, but
probably not sufficient
to deal with a systemic crisis.
But it was the framework
of handling with it.
And most important, we
didn't have the political buy
in to saying, well, here's a
crisis we have thought through
in advance through how
we might deal with it,
and we are broadly comfortable
with the framework that's
being used.
Everyone was making things
up as we went along.
And that didn't give great
confidence to the politicians
that they could afford
not to be involved,
and they certainly
wanted to be involved.
Can I-- can I open--
Yes, please, Ben.
So, first, just one theme
I'd like people to take away
is the really
substantial differences
in the powers of
different central banks.
So Mervyn can lend to
anybody, presumably,
including his gardener.
Well, I'll tell you--
[INTERPOSING VOICES]
Parliament said, well, why don't
you lend to small businesses?
Yeah.
Well, that's a risk there.
Right?
And I said, no, that's fine.
And they said, lend to small
businesses, boost the economy.
I said, I've got a really
good small business
I know I could lend to.
I know it would boost consumer
sentiment in the whole
of the Midlands in Britain.
Great idea, they said.
Only thing is, I said, it's
called Aston Villa Football
Club, at which point they
recoil from this proposal
and thought it was outrageous
that I should even consider it.
Well, the Federal Reserve,
you know, is not only--
cannot lend to-- except
in extra-- extremis,
cannot lend to an
investment bank.
It's-- de facto, its lending
authority to ordinary
commercial banks
is much restricted
because of the stigma
and the various problems.
But, interestingly-- so I think
that there's a big difference
there, and it's a concern
to me that we don't have
in the United States, you don't
have the lender of last resort
authority that's adequate.
Although, interestingly, there
is one part of our system
which actually works
very well, which
is the way the FDIC deals
with failing commercial banks,
people-- you know, small
to medium-sized banks.
If a medium-sized bank in
the United States fails,
the FDIC comes in, it
guarantees the liabilities,
it puts in money, if
necessary, it finds a buyer,
or it sells the assets.
It takes all this very neatly
with no political reaction
whatsoever.
This is totally normal, because
it's all planned in advance
and there's a set of rules.
And the Fed can stand by
to lend, if necessary,
and it's all very--
and together with a good
resolution regime, that-- that
wouldn't be a complete
solution, but it's
one approach that
would, I think,
be certainly a lot
better than what we have.
And so I think
that one direction,
it's ironic that
the United States
is the country where the Fed has
the limited lending authority,
but also has the biggest
nonbank credit markets.
So you asked earlier about
directions for reform.
I think one very
constructive direction
would be to think
about how to extend
both the benefits of the
banking charter, including
various kinds of insurance and
access to the Central Bank,
but also, the
restrictions, the capital
and supervisory restrictions
and the ability of the FDIC,
or similar agency, to
intervene, to any credit grading
firm that relies significantly
on short-term funding.
So I-- that's a
direction I think
that we ought to
be talking about
and would just take us more
in the direction of, I think,
the British and
European examples
where these institutional
features are not
quite as extreme.
Jean-Claude, you wanted
to add something?
Only to mention that, you know,
case which is really special,
obviously, we have
an institution
which has a very
high level of capital
that we are owning ourselves.
We are less depending on--
I guess, on the treasury
than in the UK or in the US.
And we have the gold
reserves, I mean,
we have an enormous
amount of capital.
That is the reason why we
took a number of decisions
in our own risk.
And, by the way,
practically all what we did
permitted us to make
money out of it.
Because counter
speculating, when you win,
you're counter
speculation, you win money.
That's-- and you take care
that the speculators are losing
money, which is a very,
very good thing, of course,
for the future.
On the-- nevertheless,
when things are real big,
I wrote messages and
letters to the institution.
And by the way, to
all governments,
in making them aware of
the fact that in the crisis
we were taking a
high level of risk,
and they have to
understand that.
Because at the last
resort, of course,
the system is such that
it is the Central Banks--
the National Central Banks
that are the owner of the ECB.
And if, which was
absolutely not the case,
I told you that we made money
out of our intervention--
but if we had reason that
would be materializing
for enormous amounts in the
future, that could be possible.
Then of course, the government
would have to step in.
But only after we would
have used our own capital.
Last point, if I may.
We have not to--
I know that it is
the rule of the game
here that we concentrate
on rules, regulations.
And I have to say that
what worries me the most
is that macroeconomic
policies are not optimal,
in my own understanding,
the world over.
Certainly, not optimal
in the advanced economy,
but also, in the
emerging economies.
I take it that it
is for that reason
that we have the augmentation
of leverage I already mention,
and which is now
understood as one
of the major,
major vulnerability
of the global economy.
And I think that we have
there to do something.
And, in my opinion,
it is quite urgent,
because we have to change the
balance between equity and debt
in practically all economies
emerging of advanced.
Thanks.
I'd like to turn to moving
on a question that I--
sorry, to Ben, on a
question that anybody
who talks with policymakers
in the United States,
particularly on the right,
has to think about very hard,
and that is, how large
should the role of--
should the role of moral hazard
be in designing facilities?
Because what you hear is, well,
that will create moral hazard.
And that is taken as
killing a proposal,
whereas, in fact, there's moral
hazard in almost any insurance
arrangement, and so
we have insurance.
But, Ben, how do-- how much is
that actually impeded anything
that the Fed has
wanted to get done?
Well, I think it's been, you
know, there philosophically,
and I think there is this fear
of-- the fear of moral hazard
has--
has led Congress sort
of to say, well, we're
not going to make
any preparation
for this contingency,
because we don't
want to give the sense that
we would, in fact, intervene.
But, of course, if
things get bad enough,
some future government
will intervene.
And so it's not a time--
as Mervyn would say, it's not
a time consistent promise.
So you're better off setting
about an ex ante structure,
which number one,
lays out the rules
and eliminates some of
the uncertainty and delay
and political costs, and so on.
Secondly, that is only relevant
during a systemic crisis.
And, therefore, if you're an
individual firm that's taking--
making bad decisions
that you're not
going to be protected except in
the event of a systemic crisis.
And third, which imposes costs.
I mean, I think, it's--
for the most part,
it's a myth that American
banks were, quote,
bailed out and held
harmless during the crisis.
You know, it's true that the
creditors were protected,
but the equity holders,
the management, and so on,
were-- were very
badly hurt by even
when their banks received
capital, for example.
So I think the answer
to the question, I mean,
you're absolutely right that
that concern is one-- is--
leads American
politicians to want
to not to prepare advance
for whatever may happen.
But it seems like
the better approach
would be, as I was
saying before, is
to have a structure in
advance where you lay out
the conditions in which
there would be intervention,
the terms of which
that would happen,
the rights of
individual stakeholders
in those circumstances, and ex
ante restrictions and oversight
that, as we do now with deposit
insurance, for example, that--
you know, that would--
ex ante would limit some of
the moral hazard problems.
So I think it's a
solvable problem.
That's encouraging, because
I know you don't exactly
say things you don't believe.
And I've heard that
argument made in the end,
they're not going to let
the economy collapse.
So they'll do whatever.
But if you believe
it, I believe it more.
I mean, not more than
you, more than I used to.
Mervyn, any comments
on this issue?
Has it been a factor in England?
So, I mean, for many
years, central bankers
would talk about in the context
of lender of last resort,
constructive ambiguity.
Well, you set me
straight on that issue.
Yes.
So I never found ambiguity
very constructive.
And I think one of the
most important things
to come out of this is the
point that Ben has just made,
which is, it is very much better
to set down a clear ex ante
framework within which
operations can be conducted,
and the rules which
will govern it.
You then get
political buy into it.
The politicians
don't have to say,
we agree with every indevelop--
individual action that's taken,
and they can hold people
accountable ex-post.
But the framework that's
being used is laid down.
And this, I think, is one
of the right ways to go.
It's why I put forward
my pawnbroker scheme,
and I'm sure there are
other ways of doing it.
But some clear ex ante
framework, I'm sure,
is the right thing to do.
And as any policy intervention
design, it's-- you know,
moral hazard is simply
a general phrase,
a very unfortunate phrase,
because it has connotations
that go well beyond
the technical.
Namely, that if you put in place
a particular policy regime,
people's behavior
will respond to it.
That's all it means.
And so, obviously, you have
to take that into account
when you design it.
So you've got to have a
consideration of moral hazard
when you design the scheme.
But merely mentioning
the word does not
mean that you can't
do something at all.
But designing it in a
proper ex ante way, I think,
is the right way to
deal with these problems
and the concerns that
maybe led to inaction.
Thanks.
Jean-Claude?
Let me just mention there's
somebody who carries
a microphone around here.
And after Jean-Claude
has made his statement,
we'll turn for it-- to the
audience for three or four
questions, and they
better be brief.
And, Jean-Claude,
please go ahead.
Well, I wanted to
make a point here,
which is that the euro
area is transforming itself
under the pressure
of the crisis.
We had two new treaties,
and we reinforced a number
of bidders for governance.
And we had the
banking union, which
is a major, of course, a
structural reform, which
was totally unexpected
before the crisis,
but was overdue at the
light of the crisis.
Because the correlation
between the creditworthiness
of the banks and the
creditworthiness of the nations
concerned appear
very, very high.
And if we want to
combat next challenges,
we have to try to detach the
creditworthiness of the banks
from the creditworthiness
of the nation,
which was the-- one of the goal
pursued by creating banking
union, giving the Central Bank
the responsibility of surveying
the financial institutions and
the banks, and giving also--
creating also a special entity,
which is not the Central Bank,
for her resolution, creating
an insurance guarantee
for deposit.
All this is work in progress,
very important, at the right
of all what we are discussing.
And I have to say
that the FDIC appears
as the model, the
whole model for us,
in terms of dealing
with small institutions.
It's really a fantastic
success of the United States.
Thanks very much.
We've got a little
time for one question.
We'll have to take it on a
geographically fair basis.
We'll take one from that
third, one from this third,
and one from the third
there over there.
But if none of you--
oh, well, you've just
put your hand up,
you've got it,
with the red shirt.
The question I have is--
Can you speak up, please?
And the mic is
about to reach you.
Hi.
Speak up and please
identify your name.
Bob Swarup, Camdor Global.
I am soft-spoken so I apologize.
The question I actually had
for the audience-- sorry,
for the speakers-- was about
Central Bank Independence.
Because, I mean, the
story I'm reminded of
is that of Heinrich
de Goertz, who
is the central banker in
charge of the Riksbank
in the late 18th century, and
he holds the dubious distinction
of being the only central
banker to be beheaded
for abusing public trust.
And it was the victim of
the fact that at the time
it was entirely a
political decision,
because the
government didn't want
the responsibility of a crisis.
And if you look
at recent events,
Donald Trump with
Jerome Powell, Ed
Balls in the Bank of England.
To what extent can Central
Bank Independence actually
be reiterated, or preserved,
in an era of we're
all kind of
interventionist politics?
OK.
Well, we'll-- we'll
take a random--
we'll take the first view to get
your hand up, how about that?
Well, none of you
raised your hands.
Jean-Claude, all yours.
Only-- only to respond
that in my case, of course,
the situation is very simple.
We have a treaty.
The treaty is associating
19 countries and calls
for full-fledged independence
for the Central Bank.
I, myself, experienced the
full-fledged independence
of the Central
Bank, I have to say.
And being protected by
your treaty, which will not
be changed, obviously, I
already said that, of course,
is in an extraordinary
protection.
And as I said, independence
must function in both direction.
Protect from the
executive branches,
be able to take bold decisions
when absolutely needed,
and when it's not obvious that
the political sphere could
decide.
But it is our own
experience in the ECB.
[INTERPOSING VOICES]
It's important to define
what independence means.
It doesn't mean, for example,
that the Central Bank can't
coordinate or cooperate
with the fiscal authorities,
as we did during the crisis,
which was appropriate.
It also doesn't mean
that the Central Bank
gets to set its own objectives.
In general, you
know, the Congress
tells the Fed to go for price
stability, maximum employment.
And, in general, the
government will give the powers
in the framework.
But it seems instrumentally
valuable for Central Banks
to have what's
called instrument--
a stand called
instrument independence
ability to set the interest rate
in pursuit of those objectives.
And I think for what
it's worth, I think--
I think the people who
are at the Fed today are--
are quite strong and independent
and will continue to make
the decisions on that basis.
I'm not concerned about that.
OK.
I think I have the
right to speak.
My name is Sri Bodhi.
And Stan Fischer was
my thesis advisor.
That's my grandfather.
But he takes no responsibility
for what I am about to say,
which is that it's been
very interesting listening
to this discussion of the
potential for systemic risk
coming from the banking sec--
sector and the shadow banking
sector.
But I am convinced
after at least 35 years
of studying the pension
system, that that
is where the next crisis
is going to come from.
And I'm even
willing to go so far
as to say what the first
warning is going to be.
And it will be the bankruptcy
of the Pension Benefit Guarantee
Corporation.
Well, thanks very much.
I don't want to
identify the person,
but somebody once
walked into my office
and wanted to do a
thesis on that point.
And this was, I think--
it wasn't you, at least
as far as I can remember.
It was somebody who's possibly
even younger than you, Sri.
The-- and I thought this was--
I was more naive
then, I thought--
I said they will never
have the capacity--
the ability to do that.
I mean, the political will
to do that and so forth.
I was probably
wrong, because they
seem to have the political will
to do lots of strange things
these days.
But that-- that's it.
We'll take that as given--
Can I just make one comment?
Oh, sure.
So it's very nice to see you,
Sri, after all these years,
and I share your
concern that there
could be an economic crisis
resulting across the world,
actually, in terms of our
inadequate pension provision.
And we've made
promises to people,
which the potential
suppliers of pensions
may not be able to meet.
I think this is somewhat
different in character
to the financial system crises
that we've been discussing.
The rungs, which-- the
solution to which has to,
I think, to come
from Central Banks.
But I think the question about
pensions is a much wider issue.
It's a very important
one, I agree.
But I think that
one, inevitably,
involves difficult political
judgments and decisions.
And that goes beyond our remit.
A central bank governor
is independent,
though we may have been.
Thanks.
Last-- last question.
Your hand was up first.
Thank you.
Wilson Irving from
Credit Suisse.
Ben, a few years
back, you testified
that if the crisis
had a single lesson,
it is that too big to
fail must be ended.
And, interestingly, just
before you, Andrew--
Andrew Metrick said
there's been almost zero
academic work in this topic.
I'd be curious as to both,
do you still hold that view?
How do you think we've
made-- how much progress
do you think we made in terms
of attacking that problem?
And why such a dearth
of interest in the topic
from academia?
Well, on the last
question, you'll
have to ask the
academics, I guess,
which I'm now sort of one
foot in each territory.
I think some progress
has been made.
I think the most important
for a time consistent failure,
you have to make it
plausible that you
could have a failure that
wouldn't bring down the system,
right?
And so that's the
essence of the--
or the liquidation authority,
the title to Dodd-Frank,
the living wills, all of that.
And I have to say I've
had a number of briefings
from the FDIC and the Fed on
the progress in that area.
And I'm a little bit more
optimistic about it than some.
I think there is
certainly a lot of--
it's certainly true that
it hasn't been tested.
It's certainly true
that it would not
be easy, particularly, for
large multinational firm
with many overseers, and so on.
But I do feel that the-- that
what's there is more credible,
and that the living
wills have led
to more simplification and other
important steps that would put
us in a better position,
certainly relative to where
we were with the ad hoc weekend
rescues of the crisis period.
So I think some
progress has been made.
There has been a bit
of academic research,
including work by government
academics, like the GAO,
for example, which have
found that the funding
advantage of large
firms has been reduced,
that the ratings
agencies have downgraded
the government support
component of their bond ratings.
So there is some evidence that
we're going in that direction.
But, you know, I
certainly wouldn't claim
that the problem is solved.
But I think some
progress has been made.
And isn't it-- isn't
it true that it
must be very few banks
that are willing to go
through this process as it
was done in this last crisis?
And they all--
Which process?
This process in which a
lot of banks went bankrupt
and were closed and--
Oh.
--sold and were fined and
was merged into other things,
and so forth.
And people, the
workers, were leaving
there with their boxes of
possessions under their arm,
and so forth.
It seems to me that if I
was running a bank, which
fortunately I'm not, I
wouldn't particularly
want to get into that.
No, that's why we're saying
that why the moral hazard
concern is somewhat overstated.
But, also, at the same
time, you know, think about
if you really can't allow
a large firm to fail,
then you're in the situation
where, you know, in a crisis,
every large firm is a
potential time bomb.
And, you know, the extraordinary
politically unpopular
and economically
undesirable steps
had to be taken to protect them.
So I think that an orderly--
I'm not-- I--
I'm not being-- arguing that
the market, you know, free--
laissez-faire is
the right thing,
I think it needs to be a guided
and an organized failure.
But-- but I think it can
be done in a way that
at least reduces the
implications for the broader
system.
OK.
Mervyn, do-- I'll give you--
each of you a one or two minute
final--
OK.
So I agree with Ben
on that, and I think
we are in a better position.
Banks do have more loss
absorbing capacity.
A byproduct of QE is that
the system as a whole
has a lot more liquidity
than before, which
is why I'd be cautious about
the speed at which we run down
Central Bank balance sheets.
Resolution has been
improved everywhere.
That's a great help.
My big worry would
be that we are still
in a position in which if
Goldman Sachs were to ring up
one day and say, terribly
sorry, chaps, we've gone bust
and we can't carry on.
That the resolution
framework which
on paper might work
smoothly, would maybe not
survive the interest
of the White House,
or Number 10 Downing
Street, or someone
in the European Commission.
And that politicians
would try to intervene,
because they would
say, none of us
really know the possible
contagion effect
of allowing a large institution
to go through this resolution
process.
That would, indeed, be true.
And the risk that that
contagion might lead to further
institutions
requiring resolution--
and it's impossible to resolve
the entire system in that way--
would lead to the need for
a overall systemic response.
Now, if we have a proper
extensive framework
for central banks
dealing with that,
then I think the risk of
that is much diminished.
But that's where I think that--
what I take away from this
is the complementarity
between the efforts
that have been
made to increase the
amount of capital
in banks to improve
the liquidity position.
Though, as I said, that more
needs to be done on that front.
And on the resolution
framework, and
on the international cooperation
between central banks
and regulators,
all of whom are now
conscious of the
problems that can arise,
and the dramatic nature of the--
and the economic
consequences of a collapse
of the financial system.
Now, the trouble
is, much of this
will fade as people
age and younger people
come in to run institutions
who don't remember the crisis.
But we have-- that's why we're
putting things down and having
an extensive framework
is important.
Thanks very much, Mervyn.
Last word, Jean-Claude's, brief.
I said already that
I was quite worrying
when I look at some indicators
of fragility at a global level,
and at the level
of many countries.
I would say one major difficulty
I see for some central banks,
and maybe all central banks of
the advanced economy, in case
we have a recession, or in case
we have to cope with something
which would have been triggered
by, I don't know, any kind
of dramatic events,
economic, financial,
a correction in asset markets,
that would be very, very big.
Then what would be
the ammunitions?
And that-- that is
really something
which seems to me
quite worrying,
obviously, and certainly, in
my own continent, if I may.
And it is, also,
something which correlated
with the lack of ammunition
on the fiscal side
in many countries.
Also, it is a real issue
that we should work on.
I don't see easy--
easy solution,
and I would not suggest
changes in monetary policy
or acceleration of going back
to more normal situation.
But we have to be
fully aware of the fact
that we will have to
utilize ammunitions,
and that they are very meager
at the moment I'm speaking,
and probably at the moment
where the challenge will come
and be the difficulty weaker.
Let me thank you,
all three of you.
I hope you realize
what these three
people and their colleagues in
the same job in other countries
had achieved.
When this financial
crisis began,
I think there was a genuine
fear among many people
who'd studied
history, and so forth,
that we were heading for
a second Great Depression.
And I think that belief was
quite common among people,
older people, who knew what
had happened in the Great
Depression.
I remember arguing
with somebody who
came to visit me at
the Bank of Israel
to explain to me
that we were doomed.
And I explained that
we actually knew
how to deal with these crises.
Which he thought was a joke.
We did deal with
these-- this crisis.
The cost of this
very difficult crisis
was much less than
the Great Depression.
Unemployment rate reached 10%.
It reached 25% in
the Great Depression.
That's enough to tell you this
was a very successful operation
if that was what
would have happened.
And my guess is, for sure, the
unemployment rate would have
been higher if we didn't--
if we hadn't carried out the
programs that were carried out.
And we were very lucky to have
Ben and Mervyn and Jean-Claude
and a lot of their
colleagues in position
to deal with this
crisis when it came.
We all owe them a
lot, and I think
we should give them applause
which relates not only to what
they've said during
this session,
but also to what they've
done in their previous job.
Thank you very much.
Thank you, sir.
[APPLAUSE]
