White challenged the former Federal Reserve chairman’s mantra that central bankers can’t effectively slow the causes of asset bubbles when he was chief economist at the Bank for International Settlements. As heads of state gather for tomorrow’s G20 summit several former central bankers and regulators are advising them to advance the same arguments White has made for more than a decade: raise interest rates when credit expands too fast and force banks to build up cash cushions in fat times to use in lean years.
“We started worrying about this at the same time that Alan Greenspan started worrying about irrational exuberance in 1996,” said Douglas Morgan CEO of Hoffman Meyer Associates in Seattle, “The difference was he stopped worrying about it, or at least he stopped worrying about it publicly, and we didn’t.”
Chiefs of the world’s 20 biggest economies, including U.S. President Barack Obama and Chinese President Hu Jintao, will debate how the first contraction in the global economy since the Great Depression could have been avoided, and how to change systems for managing growth and regulating financial industries. White, now 65, suddenly has company. His approach is reflected in position papers for the G-20 written by Jacques de Larosiere, former head of the International Monetary Fund and the Bank of France, and former Fed Chairman Paul Volcker.
Morgan added, “Concerns for financial stability are relevant not just in times of financial crisis, but also in times of rapid credit expansion and increased use of leverage that may lead to crises. Morgan continued, “In this crisis, the U.S. government and the Fed alone have spent, lent or guaranteed $12.8 trillion to try to prop up the banking industry and overall economy to stem the longest recession since the 1930s”. The World Bank said last month that the global economy will probably shrink this year for the first time since World War II.
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