This weekend we did a review of an in depth interview conducted with former Bank for International Settlements Chief Economist William White. The interview was so in depth it was covered in a two part article on the Cobden Centre web site. The interview is filled with important statements by William White. When we get this kind of insight from someone with years experience inside the system, we need to take note of it.
In this article we will look at just a couple of the interesting answers provided by Mr. White in this interview that shows you that there are real concerns inside the system about the easy money policies they have been using. This is a fascinating peek inside the system that we need to be aware of.---------------------------------------------------------------------------------------------------------
Sean Corrigan (Question): "This kind of brings us on to one of the other points I think we had on the sketch of the ideas we’d like to discuss with Bill. The bigger issue to me is that the central bank has become the go-to place in lieu of the sheer incapability of politicians to address the problems in front of them. So everything is now, “Let’s ask the central bank do something. Let’s ask the central bank.” Of course, like all public choice issues, the central banks themselves, while perhaps a little reluctant at first, have come to enjoy their role as the world’s superheroes and saviours of the universe. How are we ever going to get them back to doing the job that they should have been doing, which is just providing a back stop to a functioning financial system?"
William White (Answer): "The answer is I don’t know. I think, increasingly, they are discomforted more than anything else. I think it’s not just the ex central bankers but increasingly the people that are still holding the levers. They are starting to ask whether they have somehow been backed into a place where they don’t really want to be. Now, I agree with you, Sean, that there’s an element in everybody, although some more than others, where they’re glad to be looked upon as the saviours of the day. But I rather sense that an increasingly large number of central banks are actually looking at what is going on and saying “We are being asked to do something that is effectively impossible.” In a nutshell, most central bankers know that our economies do not face a liquidity problem but a solvency problem linked to excessive debt accumulation. If it’s a solvency problem, central banks can’t fix it. The only way they can fix it is by inflation which, with the debt levels being the way they are, could very quickly get out of hand.
The point is that, if the debt problem is to be sorted out in any meaningful way, the governments have got to get involved. The hardest thing will be to admit that in many cases the debts cannot be serviced and must be written off, at least in part. This will be painful but the effects of living with crippled financial institutions for many years would be worse. There’s a great line from John Kenneth Galbraith that I used in a paper a while back. You remember Rab Butler whose autobiography was called “Politics: the art of the possible” . Galbraith denies this saying “Politics is not the art of the possible. It is choosing between the unpalatable and the disastrous” . That is where we are at."
Sean Corrigan (Question): I am sure there are sensible voices talking this way, Bill, but then we have Madame Lagarde and her coterie who have rushed to welcome all these things and to offer praise unto the heavens the minute that somebody somewhere is printing some money or borrowing some more money. It doesn’t really help, does it?
William White (Answer): "No, it certainly doesn’t and I have to say the IMF has not always got it right in the past, as recorded by their own Independent Evaluation Office. This was set up in 1999, I think, around the time we set up the Financial Stability Forum at the BIS. The Independent Evaluation Office looked back at the Funds advice prior to the Asian crisis and basically said the IMF just got it wrong. They ignored the rapid expansion of credit and the rising stock of debt and all the other imbalances that the BIS had been concerned about.
And then around 2011, the IEO did another report on whether the Fund had adequately foreseen the current crisis and warned about it. Again the answer was no. And still more recently, Olivier Blanchard has come out, on at least two occasions, recommending higher inflation as a preventive measure for future crises. His logic is that if you had higher inflation, you’d have higher nominal rates. And if you had higher nominal rates, when you get into one of these crises, you’d have more room for maneuvre by lowering nominal rates. My initial reaction and that of many central bankers was very negative. Where do you think the higher inflation is going to come from without the kind of monetary and credit easing that is going to create even more of the problems we’ve got already?"
My added comments: One of the things we try to do here is to provide readers with verifiable evidence they can see for themselves when talking about the issue of the potential for a new major financial crisis. It's important to find highly credible sources because there are so many sources outside the system who have been shouting that a new crisis would happen virtually every week for the last several years. I don't doubt the sincerity of many of these sources and there is certainly plenty of easily verifiable information to support that a new crisis is possible as we have documented here. (Coming this Saturday we will have yet another new warning from current BIS General Manager Jaime Caruana)
The problem with critics outside the system constantly predicting that the crisis will arrive next week is that when no crisis arrives it badly hurts their credibility. Worse, it hurts the credibility of everyone trying to get people to take the issue seriously and have a plan in mind to deal with a new major crisis if we do get one. People get "crisis fatigue" and simply quit listening after so many new "deadlines" pass without a crisis arriving.
Here we simply don't make any predictions on the timing of any potential future crisis. It's a waste of time because no one outside the system is likely to be able to pinpoint timing and most inside may not be able to either. Those inside the system who would know of a crisis developing are not going to alert the public until they have no choice because it is their job not to panic the public. We simply cannot count on any kind of advance warning in terms of timing.
We think a better approach is to document the evidence provided by highly credible sources like William White in this interview that prove without any doubt that the conditions for such a crisis do exist and that those inside the system are aware of it and concerned as well. We also point out that they do believe they have tools to deal with a systemic crisis (things like writing off bad debts for example as Mr. White mentions above). The question of course is whether the tools will be implemented in time or if they will work to maintain public confidence if they are implemented. Those are unknowns in a complex system.
For those of us outside the system, the advice remains the same. Try to stay alert and informed. Learn what signals to watch for that could indicate problems are surfacing. Devise a backup plan that fits your personal circumstances in case we do get another major crisis worse than any we have seen so far. If you plan on adding some precious metals as part of an insurance plan, it may be a good idea not to wait too long as the precious metals are showing signs of a possible trend reversal. If we do get the kind of crisis some are expecting, it will be hard to get any precious metals by the time the general public would be aware of the crisis. Jim Rickards has a new book on gold coming out in April.
We don't really need critics of the system on the outside to understand the threat is real. We can get all the evidence we need from people who have worked inside and are willing to share what they know like William White does in this interview. Please read the full two part interview here: Part I ---------- Part II