Wednesday, November 3, 2010

Central Banker Who Predicted Crisis Sees Big Dangers Ahead

The global economy is in a "particularly dangerous" position that can only be corrected if the currencies of developing countries strengthen relative to those of developed countries, according to William White, one of the few policy makers to correctly predict the onset of the financial crisis.

In an interview with Dow Jones Newswires, While also said that a new round of quantitative easing in the U.S. would carry big risks as long as there is no accompanying plan to cut the budget deficit.

Until June 2008, White was economic adviser to the Bank of International Settlements, and prior to that spent 22 years at the Bank of Canada. In the years leading up to the crisis, he repeatedly warned of the dangers of allowing rapid credit growth driven by widening global trade imbalances, and criticized central bankers who argued they were powerless to address the problem.


This "massive infusion of credit" is now manifesting itself in the sharp rise of asset prices in large developing economies, which could potentially become another bubble that will burst with disastrous consequences for the global economy.

"Equity prices are going through the roof, house prices are going through the roof, there's a lot of concern that the thing might just collapse," White said.

"In effect, if one characterizes the last 20 years as being a whole series of credit bubbles...the real fear would be that this is...another one, but it's not showing up in the countries that did the initial easing, it's showing up in the emerging markets and we have to wait and see how that whole thing will play out," White said. "We are at a particularly dangerous moment."


Related previous posts:


William White, from the BIS, on failures in economic theory, politics and policy.