- Mark Carney: Growth in the age of deleveraging
- Austerity is a necessary condition for rebalancing, but it is seldom sufficient. There are really only three options to reduce debt: restructuring, inflation and growth.
- There are no effective mechanisms that can produce the needed adjustment in the short term. Devaluation is impossible within the single-currency area; fiscal transfers and labour mobility are currently insufficient; and structural reforms will take time.
- To repay the creditors in the core, the debtors of the periphery must regain competitiveness. This will not be easy. Most members of the euro area cannot depreciate against their major trading partners since they are also part of the euro.
- Vítor Constâncio: Challenges to monetary policy in 2012
- Expect to see inflation to stay above 2% for several months to come, but it will decline to below 2% during 2012.
- The ECB is able and willing to continue fulfilling central banks’ classical role as financial lender of last resort, handling liquidity problems in the financial system without endangering price stability.
- Jaime Caruana: Why central bank balance sheets matter
- Policy tools that involve the active use of central bank balance sheets – both the assets and the liabilities – can help monetary authorities to navigate the policy challenges during times of financial stress and when interest rates are close to zero.
- The increased use if these tools in recent years means that devising exit strategies from these enlarged balance sheets will be an issue that will preoccupy us for some years to come.
- Few financial variables are more fundamental than the “risk free” real long-term interest rate because it prices the terms of exchange over time.
- During the past 15 years, it has dropped from a range of 4 to 5% to a range of 0 to 2%. By late 2011, cyclical factors had driven it close to zero.
- Possible persistent factors are:
- the investment of the large savings generated by developing Asia in highly-rated bonds;
- accounting and valuation rules for institutional investment;
- financial sector regulation.
- The consequences could be far-reaching:
- cheaper leverage;
- less pressure to correct fiscal deficits;
- larger interest rate exposures in the financial industry;
- a more cyclical bond market.
- During the financial crisis, central banks in advanced countries have made the long-term interest rate a policy variable as Keynes advocated.
- Coordination between central bank balance sheet policies and government debt management is essential. With government debt very high for years to come, bond market volatility may prove inescapable
- Norman Chan (CEO HKMA): Excessive leverage – root cause of financial crisis
- Current crisis have been driven by excessive leverage in private and public sectors alike in the major industrial economies, resulting in dangerously high levels of debts.
- There is no clever or easy way out of the trap of excessive leverage. While innovative financial derivatives may facilitate borrowing and leverage, or even conceal them, no financial engineering can reduce debt and achieve de-leveraging without the required reduction in public spending and the economic and social pains that the de-leveraging process generates.
- Availability of external financing - bank loans in particular - has decreased, while the need for such finance has increased.
- Capital regulation based on risk-weighted assets encourage innovation designed to circumvent regulatory requirements and shifts banks’ focus away from their core economic functions.
- Tighter capital requirements based on risk-weighted assets may further contribute to these skewed incentives.
- Redirection towards core economic functions will impose minimal macroeconomic costs, with a -0.02% impact on GDP for every 1% increase in bank equity, relative to a risk-weighted regime.
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