Moderator: Guillermo Ortiz, Chairman of Per Jacobsson Foundation
Panelist: Mervyn King, Former Governor, Bank of England
During the great economic crises of the 20th century, there were periods of intellectual and political upheaval. Keynesian and rational expectations revolutions changed economic policy. The current environment of “extreme” uncertainty should lead to a fundamental questioning of the basic ideas underpinning economic policy. The failure to re-examine those ideas risks another financial crisis.
Context: The global recovery since the last financial crisis has been frustratingly slow and global debt to GDP is higher today than in 2007. Conventional economic thinking and too much reliance on economic models has led policymakers to misdiagnose and incorrectly plan for current challenges. The current environment is characterized by an unusual high level of political and economic uncertainty, making investors reluctant to invest. Investment is also unevenly distributed, with too much investment in some areas, and too little in others, such as infrastructure in many advanced countries.
Low growth trap. Conventional economic thinking attributes the current global secular stagnation to supply factors and is resistant to crediting this to demand factors. The aim of the traditional Keynesian model is to boost aggregate demand, either through temporary fiscal or monetary stimulus. To escape permanently from a low growth trap requires a reallocation of resources, supported by exchange rate polices and supply side reforms, and correcting unsustainable national saving rates.
Preparing for the next financial crisis. Regulators have pursued regulations that would have prevented some of the problems that occurred in the last crisis. As a result, regulatory systems have become overly complex. In addition, the cost and political economy of financial bailouts are too great. The focus needs to be on building a robust and resilient ex ante framework. Policymakers should consider an “insurance scheme,” where banks would pay a form of premium to central banks in normal periods, which in turn can lend in a crisis on terms already agreed.
“With extreme uncertainty, expectations are a dragging anchor on spending.” Mervin King.
“Following the Great Inflation, the Great Stability and the Great Recession, we have entered the Great Stagnation”. Mervyn King
“Until France and Germany can resolve their differences over structural reforms to the monetary union, monetary stimulus on a larger scale is not just papering over the cracks, but widening those cracks. ”Mervyn King
“Multilateral institutions are needed today, to find a way back to the path of sustainable growth that meets the aspirations of so many who today feel left out” Mervyn King
Contributor: Alex Lalor
Following the Great Depression, and again after the collapse of the Bretton Woods system, there was a period of intellectual and political upheaval. Keynesian and rational expectations revolutions changed economic policy. No-one can doubt that we are once more living through a period of political turmoil. But there has been no comparable questioning of the basic ideas determining economic policy. The failure to re-examine those ideas risks another financial crisis.
Guillermo Ortiz, Chairman of Per Jacobsson Foundation