Paul Tucker: National balance sheets and macro policy: lessons from
the past
Speech by Mr Paul Tucker, Deputy Governor for Financial Stability at the Bank of England,
at the Society of Business Economists' Annual Dinner, London, 28 February 2012.
* * *
The spectre hanging over the world economy these past years - the drag on our recovery -
has been deleveraging. Around the world, households, some firms, banks, governments,
whole economies are acting to reduce their debt overhang. By selling assets, cutting
spending, deferring investment.
What gets delevered - as the ugly phrase goes - is a balance sheet. Balance sheets
became stretched. Sectorally. Nationally. Through much of the industrialised West.
The idea of over-borrowing, of overstretched balance sheets, is hardly novel. Economists are
taught about the importance of stocks of debt; about "budget constraints", beyond which a
borrower's expected future income, their wealth, is insufficient to service and repay their
accumulated debts. But, by and large, economic commentary focuses on flows - the path of
output, consumption, and investment and the current account balance.
I exaggerate, of course - not least because cumulative flows create stocks. Nevertheless, it
is salutary to remind ourselves that less than a decade before our crisis broke, we - the
West - had been preaching to emerging market economies (EMEs) the necessity of
monitoring, and even managing, the national balance sheet. That was in the wake of the
Asian and Latin American financial crises of the 1990s. One of the many official reports on
the lessons took a mandate about capital flows and turned it into a series of prescriptions on
national balance sheets, including being attentive to vulnerabilities and to perverse
incentives.1
The emphasis of the Draghi Report was hardly surprising. Brazil, Mexico, and Russia had
suffered from mismatches in the maturity and interest-rate structure of their public debt. For
Korea, it had been mismatches in the external funding of the banking sector. In Indonesia,
the non-financial corporate sector had been overly reliant on short term,
foreign-currency-denominated external debt. In each case, the country's economy was
eventually brought to heel by a run.
It might have been easy for "developed" economies to ignore the Draghi Report. But efforts
were made to draw wider lessons amongst advanced economies. Thus, in late 2000, the
Bank of England ran the first of a short series of annual articles that tried to draw out the
implications of the UK's balance sheet for financial stability. It is worth quoting fairly
extensively from that first article:2
"It is advisable for authorities to monitor a range of balance sheet indicators,
focusing on variables and relationships that have in the past indicated financial
fragility.....the size and structure of the economy's foreign currency debt are
particularly relevant, especially for countries on a fixed exchange rate regime.
Sound risk management by the public sector warrants particularly high priority.
National authorities need to adopt prudent strategies and practices in managing
their own debt liabilities and financial and other assets. They should identify the
main economic risks to which they are exposed, either directly or indirectly (via
the economy as a whole). Bank regulators should measure and monitor liquidity
mismatches in banks, in the domestic currency and foreign currencies. If
necessary, governments should act to strengthen banking systems and
prudential regulation. Other parts of the private sector are generally not
regulated, but they should be subject to accounting and disclosure standards
which require transparency about the structure of their financial obligations and
claims. An adverse signal from any individual indicator does not mean that a
country inevitably faces crisis. Rather, indicators should be employed as warning
lights, highlighting potential problems and prompting further investigation. A
series of warnings may reflect escalating risks."
My purpose this evening, in the spirit of drawing lessons, is to recapture those insights in the
light of our own, advanced-economy crisis. I shall review whether it is enough to look only at
current account imbalances for warning signs, or whether gross capital flows, in particular
cross-border banking flows, matter too. I will repeatedly come back to the importance of risk
premia and balance sheets.
National balance sheets and the crisis
Recently, when events have centred on the euro area, the focus has been on the risk of
sovereign default. The underlying issue is the cumulative loss of competitiveness of some
economies, and the consequent strains in government balance sheets resulting from their
attempts over the years to use fiscal policy to sustain growth. A look at Spain's external
balance sheet reveals (net) liabilities of around 100% of GDP (Chart 1). Italy's net external
liabilities are, perhaps, rather smaller than that (Chart 2). But in terms of total government
debt, Italy's new administration inherited the greater burden. Put those two facts together and
it becomes clear that Italy's fiscal problem is partly about the distribution of debt and
resources within the country. Japan is, perhaps, not dissimilar.
Go back four-five years, to the beginning of the crisis, and the problem was the mortgage
obligations of US households - subprime households in particular were hugely over
borrowed. The commercial real estate sector too. Defaults there triggered the crisis.
Every set of defaults and problems around the world has reverberated through the UK, due
to London's role in intermediating international capital flows. We have one of the largest
gross external balance sheets (Chart 3). Although much of it is accounted for by foreign
banking activity, the City is not an entrepôt. UK banking is linked to the wider City's fortunes
via complex counterparty-credit exposures and investments. Domestically,3 UK households
had accumulated a lot of debt in the run up to the crisis, much of it matched by an
accumulation of assets. But households were dependent on economic growth being
sustained and on house prices holding up. Property companies likewise, but with the added
spice that there had been a boom in commercial real-estate construction. When crisis hit, the
government's balance sheet deteriorated dramatically, because the public finances were
highly sensitive to taxes from finance and property and, most important, the UK's fiscal
"automatic stabilizers" are strong. Households and government have subsequently cut
spending to repair their balance sheets. The corporate sector has built up what amounts to a
cash mountain, some of which will probably find its way into investment as the cloud of
uncertainty lifts, helping recovery. Sterling's 2007/08 depreciation has softened the blow to
demand. And if anything, that strengthened the country's balance sheet because, in contrast
to the EMEs discussed in the Draghi Report, the UK's external liabilities are largely
denominated in sterling while our external assets are denominated in foreign currency.
I could go through many other countries picking out ex ante vulnerabilities in their national
balance sheets, and consequent ex post strains. Banking failures brought on a credit crunch,
impaired economic growth, lowering wealth, and adding to the debt burden of borrowers, in
what threatened to be a vicious circle. But this isn't a speech about the need to reform the
"rules of the game" for finance. However levered - and the financial system was obviously
horribly over-levered - typically the house of cards collapses only when some over-indebted
end-borrowers either default or look like defaulting on their obligations. The balance sheets
of borrowers matter too! Which poses a big question of whether there were common,
macroeconomic drivers. Was the problem sourced in global savings imbalances? Did
monetary policy play a part?
International macro drivers of the crisis
The role of net savings global imbalances
The leading explanation for the macro drivers of the crisis starts with the lessons about
national-balance-sheet management drawn by Asian countries in the wake of their crisis in
the 1990s. Many decided that they should accumulate foreign exchange reserves in order to
guard against external shocks; ie self-insurance rather than third-party IMF insurance with
conditionality. National saving rose. One view4 is that, together with surpluses in
resource-rich economies as global demand for commodities increased, this drove a lot of
what followed.
Given that domestic investment in Asia could not keep up with burgeoning savings, global
saving and investment were brought into equilibrium through a fall in world real interest
rates, across the yield curve (Chart 4). As the risk-free discount rate declined, asset prices
rose, including property prices in much of the West. Borrowing for house purchases rose
accordingly; and, buttressed by higher collateral values, equity withdrawal and other
borrowing for consumption accelerated too. Other things being equal, that relative dissaving
in the West would have reduced any global savings/investment imbalance. In terms of
international capital flows, the current account surpluses in the East found their counterpart
in net external borrowing in the West.
This is a story about net capital flows. And that is what my world has in mind when it
expresses concerns, rightly, about persistent global macroeconomic imbalances.5 Such
cumulative imbalances eventually lead to macroeconomic adjustment, which can be painful.
Deficit countries end up having to save more (relative to investment) and export more
(relative to imports). Exchange-rate regimes come under pressure.
And surely there is a lot to this story. But an explanation resting solely on net flows seems
insufficient. Europe provides a striking case. The external position of the Euro Area was
broadly flat through the mid-2000s, so if the net position were all that mattered, Europe would
have been a bystander in the global elements of the crisis. In fact, the starting pistol for the
crisis in international money markets was fired in Europe in mid-2007, when a Continental
investment fund suspended redemptions following the decline in US ABS values. Overall,
even before the euro area's distributional issues came to the fore, collective current account
balance did not protect Europe from the early phases of the crisis.
Nor had the fall in world real interest rates set off a boom in property prices and mortgage
borrowing in, for example, Germany. Yet Germany's banking system was not remotely
spared crisis.
So we need richer stories to make sense of what happened.
It is precisely in that spirit that colleagues at the Bank for International Settlements6 have
stressed the importance of gross capital flows. As Cecchetti has emphasised, whereas
global current account balances (the counterpart of net capital flows) expanded in the twenty
years to 2007 from about 1% of world GDP to about 3%, the gross capital outflows of all
countries increased from around 3% to over 15% of world GDP (Chart 5). And the aggregate
international investment position of all countries7 increased from under 50% to over 150% of
annual world GDP. Opening up the possibility that gross capital flows matter transforms the
picture. For example, as Borio points out, Europe's gross capital flows were enormous,
accounting for around half of gross inflows into the US in the run up to the crisis. And
sufficient of that was invested in US ABS for the US's mortgage crisis to be transmitted
across the Atlantic, including to France and Germany, pretty well instantly in 2007 - and
before the solvency of the banking system was in doubt.
Even if gross and net flows had been equal, wouldn't the composition of those flows have
made a difference? Had the West's current account deficits been financed by inflows of
equity, would the eventual "adjustment" have been less destructive?
The flows were, of course, of debt. The accumulated "excess" savings in the East were
largely held in official, risk-averse portfolios, notably central bank fx reserves. Their
investments concentrated on fixed-income instruments: initially government bonds, but later
mortgage and some corporate securities (broadly matching the composition of capital flows
into the US, Chart 6). Combined with demographic shifts in the West pushing pension funds
into fixed-income, this might have increased global demand for bonds relative to equities,
driving down credit and term premia (relative to equity risk premia). For a while there was
probably excess - that is to say, unsatisfied - demand for bonds, and that in turn probably
had two effects. The generation of new types of supposedly "safe" bonds through
securitisation and, in particular, eventually synthetic securitisations.8 Separately, there was
arbitrage across asset classes, effected by firms borrowing to buy back their own equity and
to acquire others via leveraged buy-outs.
In summary, while the ex ante global savings/investment imbalances plausibly drove down
equilibrium world risk-free interest-rates, the precise composition of the resulting capital flows
will have affected risk premia too.
Monetary policy, international banking flows, and global liquidity
The other story aired about macro drivers is the possible role of monetary policy and private
sector credit creation. And that too points to a role for risk premia.
Against the grain of established thinking, and now famously, Raghu Rajan argued at Jackson
Hole in 2005 that the Federal Reserve's commitment at the beginning of last decade to keep
policy rates low for a prolonged period had fuelled financial risk taking.9 While this is now
posited as the "risk channel" of monetary policy,10 there has until recently been relatively little
empirical work bearing on whether it actually exists.
That may be changing. Amongst other examples, recent work by Jeremy Stein and Samuel
Hanson at Harvard and, subsequently, by a Bank of England team11 has found some
evidence that changes in Federal Reserve and Bank of England policy rates are
accompanied by material (similarly signed) changes in long-term real forward rates. This is
striking given the usual assumptions about monetary policy being both credible (no effect of
cyclical policy on long-term inflation expectations) and neutral (no effect on real magnitudes
beyond cyclical horizons). While, I must stress, not proving anything, this is consistent with a
group of investors responding to lower short-term rates by moving along the maturity
spectrum in a "search for yield". That interpretation is, to my mind, fortified by a finding, for
the US, that the effect on long forward real rates is greater when short nominal rates are low.
Imagine the behaviour of asset managers who have guaranteed a minimum nominal return
to investors. This is the "carry trade" - perhaps mythical for many years to many economists
as there is a flavour of "irrationality" around it, but part of the fabric of the world for
practitioners.
Although current mainstream "structural" models of conventional monetary policy do not work
like that, perhaps we should not be too amazed. The thought that injections of central bank
money can be transmitted to the wider economy through risk premia, as well as through the
risk-free rate, goes back at least to Brunner & Meltzer.12 It is precisely how the Monetary
Policy Committee, and our international counterparts, regard Quantitative Easing as working
- influencing term, liquidity and risk premia.13 And since prices are the "dual" of quantities, it
is hard to see why there should be something special about injecting central bank money into
the economy by buying assets rather than via our normal policy lever of the overnight interest
rate (and expectations about its path).
This prompts a number of conjectures. One is that maybe monetary policy did contribute to
the widespread search for yield, not just along the yield curve but also, as Rajan suggested
in 2005, into credit products to earn a spread compensating for illiquidity or complexity.
Another conjecture, perhaps supported by other recent research,14 is that this may have a
bearing on the phenomenon of cross-currency carry trades, and thus on the generation of
"Global Liquidity". That is a nebulous concept, but one that central bankers have come to
think of as intimately tied up with private sector credit creation (essentially bank lending)
across borders.15 When cross-currency carry trades drive down risk premia, that pushes up
foreign asset prices, and can fuel foreign credit growth, through a process that is akin to an
10
This channel is distinct from the standard channels working through the effect of a lower risk free rate on asset
prices, and so on wealth and the availability of credit, eg the so-called "financial accelerator" of Bernanke,
Gertler & Gilchrist. On the "risk channel" see, for example, Borio and Zhu (2008), "Capital regulation,
risktaking and monetary policy ; a missing link in the transmission?"
11
See Annex 2
12
See "Money and the Economy: Issues in Monetary Analysis (Raffaele Mattiolo Lectures", Brunner and Meltzer
(1987). It was also discussed by Governor King in "Challenges for Monetary Policy: New and Old" (1999),
discussing the operation of monetary policy when interest rates are low; and in "No money, no inflation - the
role of money in the economy" (2002).
13
See "Quantitative Easing: An Inflation Report", Bean (2009); and "The State of the Markets", Tucker (2009).
14
See, for example, "Carry trades and risk", Burnside (2011); Common Risk Factors in Currency Markets, Lustig
et al (2011); Crash-neutral currency carry trades, Jurek (2009).
15
See CGFS (2009), "Global Liquidity - concept, measurement and policy implications". A report submitted by
an Ad-hoc Group chaired by Jean-Pierre Landau.
increase in risk appetite. It is not far fetched to ask whether excess Global Liquidity can
result.16
We thus have two broad stories of what kicked off a period of pronounced credit growth and
asset price appreciation. First, a fall in the world safe real rate, due to excess savings in the
East. Second, increasing Global Liquidity, transmitted through expansive cross-border
lending, kicked off by prolonged accommodative monetary policy. These stories are not at all
mutually exclusive.17 And, most probably, both contributed to exuberance.
But it is not my purpose this evening to revisit how asset-price appreciations that are initially
fundamentally warranted can get out of control through the "Minsky" mechanisms of
extrapolation of past returns into future targets, herding and myopia18 - the last no doubt
aided by exaggerated market beliefs of what monetary policy can achieve following years of
uninterrupted growth. Rather, it is important to my purpose this evening that both stories
involve shifts in risk premia driven by changes in the supply and demand for financial assets.
Shifts in risk premia, gross capital flows, and balance sheet strains
That story would hardly have interested most macroeconomists a few years ago. Financial
asset prices were regarded as providing useful information because they are forward-looking
and available at high frequencies, but no more; they were not seen as actors. Indeed, many
of today's macro models used in policy making embody an assumption that risk premia are
either constant or do not exist; and that therefore asset prices, and so wealth and the cost of
capital, are influenced only by changes in the expected path of the risk-free rate and in the
cash flows expected from investments.
For anyone who has spent time in markets, that seems at odds with their experience. It is,
therefore, of some moment that some recent research has suggested that, for all major asset
classes, the principal drivers of fluctuations in asset returns are shifts in risk premia rather
than in expected cash flows19 (ie dividend growth for stocks; the path of monetary policy
rates for low-risk bonds; default incidence for bonds carrying credit risk; rental growth for
house prices etc). Furthermore, some empirical research now suggests that shifts in risk
premia are key factors in macroeconomic fluctuations.20 This is a big deal.
We have seen massive shifts in risk premia over the past ten years (Chart 7) - first a
compression and then a blow out. Those shifts seem to be associated with capital flows,
channelled through banks and shadow banks, that led to an expansion of Global Liquidity.
Balance sheets were left at first fragile and then, when the balloon burst, enfeebled.
In the case of continental Europe, for example, banks had increasingly borrowed short-term
from US money funds, only to suffer a slow-motion run when their capital adequacy came to
be questioned. And it was placed in doubt partly because banks in those countries spared a
16
See "Global Liquidity", M Carney (2011), at the Canada-United Kingdom Chamber of Commerce.
17
Both play a role in, for example, Obstfeld and Rogoff (2009), "Global Imbalances and the Financial Crisis:
Products of Common Causes"
18
See "Reforming finance: are we being radical enough" Clare distinguished lecture in Economics and Public
Policy, Turner (2011) and Discussion by Tucker (2011).
19
See Cochrane (2011) "Discount rates", Journal of Finance, Vol. 66, pages 1,047-109.
20
For example, Justiniano et al (2011) decompose the drivers of US macroeconomic fluctuations using two
different technology shocks: to the relative price of investment and to the transformation of savings into future
capital input. They find that the latter shock is the most important driver of US business cycle fluctuations and
is almost identical to the observed spread between high-yield (non-investment grade) and AAA-rated
corporate bond yields. This echoes work a generation ago by Ben Friedman and Ken Kuttner (1994),
"Indicator Properties of the Paper-Bill spread. Lessons from recent experience."
property boom had, directly or indirectly, financed property bubbles or over-indebted
governments elsewhere around the euro area.
In the US, as elsewhere, a supposed business model of "Originate & Distribute" - ie capital
market intermediation - morphed into "Originate & Warehouse the large pieces that cannot
be distributed, or at least tuck them away in shadow banks we can fund". This provides a
telling example of the perverse incentives that the Draghi Report had highlighted a decade
earlier. Booking practices and pricing were distorted by lax overall regulatory capital
requirements, a zero-weighting on 364-day committed lines to shadow banks, accounting
regimes that recognised unearned profits on highly illiquid securities, and an implicit state
subsidy to housing finance from public agencies that were themselves over-levered and
profit-maximising.
Policy responses and lessons
Looking back, armed with these conjectures, what could or should have been done as our
economy and others accumulated debt?
A few years ago, a couple of us discussed this in the margins of a regular gathering of
economists in London.21 One thought was that Western governments should have "gone on
the biggest infrastructure splurge since Victorian times", spending the inflows on investment
rather than consumption. I can't help wondering whether all the investment would have been
well judged. Another thought was that the UK and others should have tightened fiscal policy,
in order to raise national saving and so improve our external position. That would have
added to global saving, possibly pushing the world real rate lower, asset prices higher, and
so possibly further fuelling private sector borrowing.
But were we trying to answer the right question that evening? As you will have gathered, in
effect it was: "If Asia was going to be in surplus, and other things equal the West was going
to run the counterpart external deficit, what should we have done?"
As one looks back at the evolution of sectoral balance sheets and their role in the origins of
the crisis, that question cannot stand alone. The crisis was not rooted simply in our
economy's external balance sheet, nor in that of the US.
Does that mean that fiscal policy was and is irrelevant to national balance sheets? Hardly.
On the one hand, it would be odd for fiscal policy to take upon itself the task of actively
offsetting shifts in private sector saving through the government balance in order routinely to
manage overall (net) national saving. If parts of the private sector are becoming
overindebted, the authorities should use other tools to address the problem at source.
Similarly, if the composition of aggregate demand is persistently unbalanced, government
should perhaps at least see if it can rectify any microeconomic incentives that aggravate the
imbalance.
On the other hand, I would argue that the management of a government's balance sheet
cannot be indifferent to the balance sheet of the rest of the economy. It matters if, as was the
case in the UK, the public finances are especially sensitive to the well being of highly levered
sectors of the economy and the automatic stabilisers are strong. That is a recipe for
government debt to rocket if banking sector problems choke off credit supply and economic
growth. The 1999 Draghi Report urged authorities' risk monitoring to identify that kind of
vulnerability.
This goes some way towards making the case for the "structural" element of macroprudential
policy. We need a resilient financial system partly because governments cannot always take
the full burden of supporting spending in the economy in the face of a credit crunch.
Monetary policy
But what about lessons for cyclical macro policy?
As I have discussed, I think we should take seriously the possibility that monetary policy
- and, indeed, impulses in the supply of broad money from bank lending - can affect risk
premia. And we need to go the further step of not ruling out that this could sometimes
exacerbate medium-term imbalances. That does not, however, drive me to a conclusion that
monetary policy should be used for broader objectives than targeting inflation over the
medium term. As we learn lessons from one terrible crisis, we must not lose sight of the
hardship caused by the inflationary boom-and-bust episodes that occurred until the current
monetary regime was developed during the 1990s. And we need to place some weight on
there not having obviously been a boom in nominal demand in the run up to the crisis, either
here or in the USA, although there were building booms in some countries.
That being so, the question is what to do about the possibility that, occasionally, stimulating
demand to offset macroeconomic damage from the crystallisation of one set of imbalances
can fuel a new set of imbalances. The question is posed most pressingly about the US. But,
in the UK's recent monetary history, one finds a parallel in the debate in the early 2000s
about whether or not there were limits to a strategy of stimulating domestic demand
- principally household spending - in order to offset the effects on the medium-term outlook
for inflation of pronounced weakness in external demand and business investment after the
bursting of the Dot.Com bubble.
Seen in that light, the central question becomes whether the authorities should have tools to
check the evolution of stretched balance sheets, particularly in the financial sector, in the
face of robust credit growth and asset price appreciation. This goes some way towards
making the case for the "cyclical" elements of macroprudential policy.
And that, of course, is a key destination for me this evening. When, more than a decade ago,
the Draghi Report exhorted domestic and international authorities to monitor and maybe
manage national balance sheets, the term "macroprudential" was used only by
Andrew Crockett, Claudio Borio and their colleagues at the BIS.22 Now it is a buzzword -
planned in the West and used already in parts of Asia and Latin America.
Macroprudential policy: tempering but not obstructing financial liberalisation
Plainly finance got out of hand. Not for the first time in history. For me, the most instructive
chart in Reinhart and Rogoff's already famous book is the one showing that truly big crises
are typically preceded by financial liberalisation (Chart 8)23. This reminds me of what was
said when the UK's Secondary Banking crisis followed not so shortly after 1971's
Competition and Credit Control: "we had the competition but forgot about the control".
We should not sacrifice the gains to global trade (and to freedom) from the free flow of
capital across borders and the capacity to innovate. But we obviously do need to be better
equipped to contain excess and to ensure resilience as economic and financial conditions
change. That is what macroprudential policy is about.
One can think about this in a number of ways. And, consistent with my themes this evening,
they revolve around risk premia and balance sheets.
The Governor of the Riksbank, Stefan Ingves, has suggested that whereas monetary policy
sets the path of the (short-term) risk-free rate, macroprudential policy (in its cyclical mode)
will work on credit and risk premia. In that light, it could in theory be cast as an enriched
Taylor Rule, where a single policymaker "sets" both the risk-free policy rate and the credit
spread on bank lending.24
This is, of course, an elegant and illuminating thought experiment. But can we do it? The
"cyclical" macroprudential tools most discussed are variations of capital or liquidity or
margin/haircut requirements. For now, I do not think we know enough about how they will
work to control spreads and risk premia. And nor would we know precisely where we wanted
to put these premia even if we could control them. This is not remotely a counsel of despair
given the goal here: to choke off tail risk.
Instead, I find it easier to think about the broad goals of macroprudential policy in terms of
balance sheets. The regulatory reform Bill currently going through Parliament enjoins the
Bank's Financial Policy Committee to take heed of unsustainable levels of debt, leverage or
credit growth, with the aim of ensuring that the financial system becomes and remains
resilient. In other words, consistent with the theme of my remarks this evening, the FPC is to
act upon the balance sheets of financial intermediaries, and indirectly to influence the
balance sheets of other sectors of the economy. That means making judgments about
incipient risk to the financial system from its own balance sheet and from borrowers. It means
being ready temporarily to raise regulatory requirements above their minimum level when
risks from the economic and financial environment exceed anything remotely calibrated into
the standards that apply in broadly normal conditions. And it means promptly relaxing those
extra requirements once the risk to stability has passed.
This is a massive step. No one is pretending that the policy community knows how to cast it
in terms of a numerical target or a uniquely useful set of indicators, against which society can
monitor us. And that underlines the importance of Parliament itself approving the instruments
granted to the FPC, and of our being sufficiently transparent to enable public scrutiny of and
debate about our analysis and policy decisions. The Bank/FSA Discussion Paper on
macroprudential instruments published last December was a contribution to that.25
Back to current account imbalances: they do matter
But that is not all that we, policymakers, should be modest about. If, as I believe,
macroprudential policy can prospectively fill a gap, we must not pretend that it can be a cure
for everything. Even if we had avoided the worst consequences of seriously suboptimal gross
capital flows - a badly overlevered banking system dependent on flighty wholesale funding -
there would still have been the problem of unsustainable global current account imbalances.
Whether the eventual adjustment would have been disorderly and how costly is hard to tell.
Net imbalances do matter, and macroprudential policy will not solve the deep problems of the
international monetary system; nor will the temporary capital controls employed by some
EMEs on "macroprudential" grounds. That question is still with us because those imbalances
are, broadly, still with us. And if the surplus countries do not adjust, that poses tough
challenges for the rest of us.
Lessons for the policy framework
Where does that leave us? Summing up my analysis, it is that we must use financial asset
prices, in particular spreads, alongside quantities as indicators of risk ta