Tags: OECD | William White | BIS | bubble

OECD Economist Warns of Greater Dangers Than Before Financial Crisis

By    |   Wednesday, 13 Sep 2017 01:08 PM

As stock markets reach record highs, one economist is warning that bubble-like conditions are growing as debt levels skyrocket and increase the likelihood of more defaults.

William White, an economist who chairs the OECD Economic and Development Review Committee, said today’s expensive markets are reminiscent of the years leading up to the 2008 financial crisis, which triggered the worst economic collapse in 80 years.

“We’re seeing all sorts of odd developments in financial markets. The prices of many financial assets are very high,” he said on Bloomberg TV. “Things could work out all right, but there are enough dangers that one should be thinking about the downside.” White formerly was economic adviser at the Bank for International Settlements.

He pointed to the expensive prices for high-yield debt, or junk bonds that are issued by the least creditworthy companies. He also said the VIX index, which measures how much investors are protecting themselves from a market decline, is very low, indicating widespread complacency.

Meanwhile, home prices are outpacing wage growth, which has echoes of the subprime bubble that peaked in 2006. Banks and other financial services firms fueled the bubble with lax lending standards that granted loans to people who had little or no ability to repay them.

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Since then, central banks like the U.S. Federal Reserve have maintained looser lending standards in an effort to stimulate growth. But that policy has the side effect of creating unstable asset bubbles.

“We do not have a liquidity problem that central banks can solve,” White said. “If the underlying problem is too much debt, then we have a debt resolution problem and an insolvency problem. Only governments can address problems like that.”

China is especially worrisome because the debt levels of its companies have outpaced the country’s economic growth.

“I don’t think anybody has ever seen anything like it before,” White said. “It’s not just the level of debt that’s worrisome. It’s the speed at which the debt accumulated, which leads you to believe that perhaps the vetting of the loans has not been as careful as it might have been. Some of these loans that should never have been made will not be repaid and will not be re-serviced.”

He said countries need to find other ways to stimulate economic growth than depending on central banks to provide cheap liquidity.

“We need more fiscal expansion for those that have room to do it,” White said. “We need structural reforms to allow faster growth and a greater capacity to service debt.”

In addition, banks need to write down their bad loans, he said. Writedowns are painful for financial institutions, but can be considered necessary as part of the process of killing off zombie banks that can't make loans and choke off economic growth.

We need “a greater willingness to look the debt beast in the face and say, ‘Some of these debts will not be serviced. They have to be written off,’ and maybe financial institutions recapitalized as a consequence,” White said.

Countries also need to look at ways to help wage earners earn a better income instead of investors who are providing capital, he said.

“Something has gone seriously wrong in many countries in terms of the mix between wage income and capital income,” White said. “We should be doing a lot more thinking, as already has started in China, about whether wages ought not to be higher -- at the expense of the people that invested capital in various businesses.”

Central banks and fiscal policymakers need to wean their economies off cheap money while avoiding destabilizing bubbles and panics.

“It’s not just simply a question of reversing the easing of monetary policy, because there have been side effects of that easing that have been accumulating over the last eight or 10 years,” he said. “The tightening of the central banks, which is inevitable, the movement up in bond yields, which is inevitable, must be done very, very carefully. If the care is excessive, we build up more of these imbalances which will make the resolution even more difficult.”

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As stock markets reach record highs, one economist is warning that bubble-like conditions are growing as debt levels skyrocket and increase the likelihood of more defaults. William White, an economist who chairs the OECD Economic and Development Review Committee, said...
OECD, William White, BIS, bubble
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2017-08-13
Wednesday, 13 Sep 2017 01:08 PM
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