samchain/econo-pairs-v1 huggingface dataset:
The difference today is that the surplus this time has contributed to excessive borrowing in many western countries rather than to a debt crisis in Latin America. But the theme remains largely the same: Plenty of  2  BIS Review 149/2010  money to lend, excessive optimism among lenders and borrowers and inadequate controls and supervision – this is usually a sure recipe for a crisis. Global challenges So much for the causes of the financial crisis. What about its consequences? One obvious consequence has been that many countries have needed to use fiscal policy to support the bank sector and to maintain demand in the economy. As tax revenue has fallen as demand has weakened so much, this has led to large budget deficits and rapidly growing government debt. One might say that the debt problem has been transferred from the private sector to the public sector. So to return to my earlier discussion of the debt crisis in the early 1980s, one can perhaps say that the result of the international imbalances was once again a form of public debt crisis. All in all, this means that the global economy is now facing at least three major challenges: Firstly, the regulations for the financial system need to be tightened, and supervision needs to be more effective. The aim is, of course, to increase stability and resilience in the financial system and reduce the risk of future crises.

This positive trajectory reflects a number of key fundamental strengths in the Thai economy. First, our human capital remains intact and strong. Thailand’s flexible and skilled workforce will continue to provide a solid foundation for businesses to flourish and expand. Second, the corporate sector boasts healthy balance sheets from accumulated savings and profits, enabling them to rebuild and invest. Third, the banking sector is strong and well-placed to provide the financing necessary to sustain the investment cycle. Finally, Thailand is well positioned geographically to serve as a supply-chain hub for many industries and to reap the benefits of an expanding as well as more integrated Asian economic block. As alluded to earlier, the process of regional integration will provide Thailand with enormous opportunities to expand our role in the region through increased trade in goods and services. Realizing these opportunities will not be easy, nor will they be automatic. The key impetus falls on structural reforms that lift Thailand’s international competitiveness. Considerable adjustment and transformation of our economy will be required. Factors of production will have to be reallocated to activities that offer the most promising way forward. Government policies and laws will have to be updated and changed to best facilitate such structural adjustments, all the while making sure that the burden of adjustment on those who stand to lose is bearable. The pursuit of economic growth should not be absolute, but inclusive. As should be apparent, such challenges cannot possibly be completely met in the short-term, let alone in 2012.
William C Dudley: The challenges ahead Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Center for the New Economy 2010 Economic Conference, San Juan, Puerto Rico, 19 February 2010. *  *  *  Thank you very much and good morning. Although this is my first visit to Puerto Rico in my current role, I have been here a number of times, going way back to a childhood visit with my parents. It’s a beautiful and special place, but I must admit that coming in February has some special advantages. I welcome this opportunity to talk with business leaders, workers and educators. My goals are to hear what issues are on the minds of people here and to let you know what the Federal Reserve has been doing to help improve the economy. So I’m very grateful to the Center for the New Economy (CNE) for giving me the opportunity to speak to – and learn from – you. As always, what I have to say reflects my own views and not necessarily those of the Federal Open Market Committee or the Federal Reserve System. I want to start by talking about the implications of the close economic ties between the mainland and Puerto Rico. Since the economies of the mainland and the Commonwealth are very tightly linked, what happens on the mainland has important consequences for Puerto Rico, as well.

As an illustration, the Pension Protection Fund’s PPF 7800  index suggests that, between end-2021 and end-  September 2022 – a period in which interest rates rose substantially – the liabilities of UK DB schemes fell by 36% (from £ to £ whereas their assets fell by only 20% (from £ to £ leaving their net assets nearly three times higher. 2. See Thirteen days in October: how central bank balance sheets can support monetary and financial stability – speech by Andrew Hauser 3. See The impact of leveraged investors on market liquidity and financial stability – speech by Jon Cunliffe 4. See Taking our second chance to make MMFs more resilient - speech by Andrew Bailey 5. See ‘The role of non-bank financial intermediaries in the ‘dash for cash’ in sterling markets’, Bank of England Financial Stability Paper, number 47. 6. See ‘Seven Moments in Spring: Covid-19, financial markets and the Bank of England’s balance sheet operations’ – speech by Andrew Hauser 7. See ‘Sizing hedge funds' Treasury market activities and holdings’  ,  8. See ‘Hedge Funds and the Treasury Cash-Futures Disconnect’ 9. See ‘Leverage and margin spirals in fixed income markets during the Covid-19 crisis’  10.
But adaptation requires reflection and caution However, this would not be an easy task. Firstly, the central bank is of course unable to change its behaviour so much that doubts arise as to whether it is actually trying to maintain low and stable inflation. What is known as the nominal anchor, that is the landmark for pricesetting and wage formation, may then be loosened. This would mean losing all we have achieved over the past two or three decades. But even if nothing this dramatic happened, sufficiently large changes in the central bank’s behaviour might nevertheless have undesired consequences. The flatter Phillips curve could reasonably be due to economic agents, such as the social partners, having adjusted their behaviour to how they believe the central bank will act. If the central bank changes its behaviour too much, this may have the consequence that economic agents begin to act differently, too. We will then once again have a new playing field, where the Phillips curve may once again have become steeper.7 Even with these reservations, I believe that it is generally valuable for the central bank to constantly ask itself how it can best ensure that it deserves its independence. What I mean by this, of course, is not that it should anxiously ask its principal what to do – that would mean its independence was lost.

Looking at Sweden, I think it is quite clear that the introduction of inflation targeting in connection with the crisis in the early 1990s was one of the most important reasons why the Swedish economy has developed so well since then. However, financial crises can also arise in environments with low and stable inflation. Nominal GDP target scarcely better Can one say that inflation targeting has been an obstacle to the recovery, and in that case are there other ways of conducting monetary policy that might succeed better? Here one can begin by noting that, in general, inflation-targeting countries appear to have managed the crisis better than countries without inflation targets.12 The central banks with inflation targets acted more powerfully, inflation expectations in inflation-targeting countries were better anchored and the risk of deflation was lower. Nevertheless, the slow recovery in countries such as the United Kingdom and the United States has started a discussion as to whether alternatives to inflation targeting would be better. One suggestion that has gained supporters is to replace the inflation target with a target for nominal GDP.13 The main discussion recently has concerned introducing a policy  9  See Reichlin and Baldwin (2013) for a compilation of a number of economists’ views on inflation targeting and its future. 10  See, for example, Bini Smaghi (2013). 11  See Bernanke, Laubach, Mishkin and Posen (1999). 12  See De Carvalho Filho (2011). 13  See, for example, Frankel (2012).
I strongly believe that this is not true. If a proper restructuring is to be done, professional restructuring people without historical relations to the customer should do it. Whenever I have been persuaded otherwise I have later been proved wrong. The second argument for transferring the non-performing assets is related to this. When the management of a bank has a large number of bad credits to take care of, that is exactly what they do. All their capacity is used up taking care of problems and there is no time - and no money - to think about the future. This is disastrous for the whole organisation, which tends to become backward looking and defensive instead of forward looking and offensive. Only when the bad assets are out of the books of the bank, the minds of the management and thus of the employees can become aimed towards the future. Having decided to transfer the bad assets, the next obstacle will be to decide on the prices. The bank usually considers the non-performing assets to be quite valuable, at least in the long run. Selling at what might be considered present market prices will create too big a hole in the balance sheet to make management comfortable. The management of the new AMC quite naturally has a different view. It has no wish to get assets into its balance sheet at values that later turn out to be excessively high.

The macroeconomic reasons for the occurrence of the current crisis could further be divided into two groups: a) problems related to unbalances in the international claims and b) problems caused by the maintenance of low real interest rates over a longer period. The first group of macroeconomic reasons includes unbalances in the current accounts of balance of payments among economies, which, in turn, brought about unbalances between the capital accounts. In that process of creating unbalances, especially in the decade before the crisis, the capital spilled over from the developing countries to the developed economies, particularly to the US. The second group of macroeconomic reasons resulted from the excessively long maintenance of low real interest rates. The historically low real short-term interest rates actually reflected adjustable anti-deflation monetary policy. The low long-term interest rates, on the other hand, largely reflected the high savings rate in the capital-exporting countries, particularly in the Asian developing countries and several oilexporting countries. These countries, seeking for sound financial instruments to place their savings, increased the demand for long-term government securities issued by the governments of the developed countries, thus contributing towards reduction of the long-term interest rates. The low interest rates had multiple effects, including the acceleration of the credit growth in a number of industrial countries, swift growth in the prices of properties and share; and generally, taking high risks during the contest for generating higher earnings. The financial crisis, however, demonstrated that there are serious problems in the area of microeconomics, as well.
These bills were bought by the Bank and stored in its vaults, in what became known as the “cold storage” scheme.5 By freeing the banks’ balance sheets in this way, the cold storage scheme was intended to stimulate credit. It was only a limited success, with the banks still fearful about making new loans because of the rising risk of default by overseas borrowers. In response, the government announced an extension to the scheme, with the government effectively insuring the banks against the credit risk on these assets too. It worked. Within a couple of months, money market conditions had stabilised and credit was once more flowing. Cunliffe’s cold storage plan had averted a credit crisis. The cold storage scheme was a piece of clever financial engineering by the Bank, designed to support credit and the wider economy. In the past few years, with credit growth and the economy weak, the Bank has been in the vanguard of creating new pieces of machinery to serve a similar end. In 2008, the Bank introduced a Special Liquidity Scheme, or SLS, to help finance UK banks’ legacy asset portfolio. Over £ billion of support was provided to the banks and has since been repaid.6 The SLS bears more than a passing resemblance to the first phase of the cold storage scheme. In June this year, the Bank announced a second scheme, the Funding for Lending Scheme, or FLS.

Given the Bank’s somewhat chequered record on gender diversity up to that point, it was rather unfortunately named CHAPS. And indeed still is. In 1993, the Bank stepped-in to rescue a flagging project to upgrade the securities settlement process in the UK. The Bank designed and built a new, safety-first, system which again exists to this day. Fortunately, we did not call this one BLOKES, but rather the gender-neutral CREST. Most recently, in the light of the crisis, the Bank has been at the forefront of the debate about re-organising the structure of banking, with a ring-fence or firewall between the basic retail and investment banking sides of the business. This structural approach is increasingly finding favour both in the UK (through the proposals of the Vickers Commission) and internationally (for example, through the Volcker proposals in the US and the recent Liikanen proposals in Europe). 9  Sayers (1976). 10  Sayers op cit. BIS central bankers’ speeches  5  For the past half-century, the Bank’s structural agenda has become a central feature. But at the time it marked a radical departure from the Bank’s past. Designing what are in effect financial public goods is a front-foot activity. The Bank had grown a new limb, augmenting its crisis-management right arm with a crisis-prevention left arm. Stitching it all together So far, I have made no real mention of monetary policy. That is because, for much of its life up to the early 1970s, monetary control at the Bank of England was pretty simple.
We believe that the Solvency II Own Risk and Solvency Assessment, the ORSA, will help give us a better understanding of an insurer’s business. It is therefore logical for us to make early adjustments to our existing regime to incorporate the ORSA under ICAS plus. This will mean that UK insurers are better prepared for the introduction of Solvency II. To monitor the on-going appropriateness of internal models, we have introduced the use of early warning indicators based on metrics that are independent of the model calculations. In cases where the indicator’s threshold is breached it will trigger an immediate supervisory  4  BIS central bankers’ speeches  response; a capital add-on is, in all but exceptional cases, likely to be the most effective way to restore compliance with the Solvency II calibration requirement (i.e. 99.5% over a one-year period). Importantly, we expect that where internal models are used for regulatory capital purposes, they should contribute to prudent risk management and measurement. And they should be updated regularly in order to reflect the insurer’s risk profile and not just to ensure compliance with the letter of our requirements. My view is that we still have a good way to go to make the Solvency II regime manageable in its use and implementation. I have to say that I think the early design did not come up to the mark in this respect.

But it raised an important theme that has to be considered more widely, namely that our approach to supervision of firms ensures that senior individuals are properly accountable and thus incentivised. The record of the banking crisis indicates that this senior accountability was not effective in banks that failed. Often, the simplest points are the most powerful, and complexity is a poor guide. Andrew Tyrie and his colleagues have done a great service by making a simple but powerful  BIS central bankers’ speeches  3  point – as supervisors we must incentivise and hold to account those at the top, and not seek to do the job of management by influencing excessively further down. I could not end without talking about Europe and Solvency II and wider global developments in insurance regulation. A month or two ago I ruffled a few feathers by criticising the cost and time taken preparing for a European Directive that isn’t finalised. I have no regrets, because as public officials we have to speak honestly and transparently. I was making a point on behalf of firms because I feel strongly that you have been put to too much expense and time spent by management and boards. But, in saying this, I should be clear that the PRA has not withdrawn from involvement in Solvency II, far from it. As Tidjane said this morning, the insurance industry and its regulators cannot operate in a vacuum.
To ensure that European Allies and neutral countries retained access to London markets and had a safe place to deposit assets and the proceeds of their rapidly-increasing wartime borrowing, and pay for supplies, the Bank of England opened ten accounts in the early part of the war (for France, Belgium, Italy, Serbia, Romania, Portugal, Egypt, the Netherlands, Norway and Switzerland). The United States had the opposite problem. The War had led to a huge increase in the demand for US exports from Europe, paid for by foreign assets, typically gold. These massive capital inflows risked driving excessive domestic US credit expansion, threatening inflation and undermining the fixed exchange rate between the dollar and gold, unless the excess could be recycled overseas. But the United States of the time lacked what Strong termed the international ‘banking machinery’ needed to effect this recycling. And the sheer scale of capital movements risked overwhelming the traditional system of physical gold transfers, given the limited global supply of gold, and the significant cost and risk involved with gold shipments in wartime. Strong noted that the desired machinery could take one of three possible forms: the US could lend directly to European banks; it could lend indirectly through private brokers; or it could retain the central banks of Britain and France to act as its agents, purchasing commercial bills, gold and deposits in European markets.

We are therefore faced with a situation where the traditional triangle of the trilemma is shrinking and sometimes seems to collapsing into the straight line of a dilemma. I still think it is a trilemma, but the trade-offs facing SOFIEs can be severe. In principle, there are three ways to mitigate the problem. The first is to adjust macroeconomic policy frameworks and improve execution and policy co-ordination. The second is to use prudential regulation and supervision aimed at reducing potential vulnerabilities and increasing resilience in the face of volatile capital flows. The third is to introduce targeted tools aimed directly at the financial integration part in order to regain greater monetary independence and shift the effects of monetary policy more to the interest rate channel and towards the non-traded goods sector. In Iceland, this issue is very much on the agenda as the country prepares to lift the comprehensive controls on capital outflows that were introduced at the peak of its financial crisis. We have been working through all of the avenues that I have just mentioned. Very recently, we introduced a CFM tool in the form of a special reserve requirement on portfolio inflows excluding equity. It is constructed in such a way that the bite is biggest for short-term flows.
In the case of this country these adverse international influences really began to affect us just as overall demand was already weakening in response to the earlier monetary, and incidentally fiscal, tightening. The result was a very sharp decline in industrial – especially manufacturing – confidence, and widespread, and often exaggerated, fears of recession, which in turn appeared to undermine consumer confidence. The slowdown – or soft landing – we had been consciously seeking to engineer threatened quite rapidly to become a much sharper decline – or harder landing – than we had either expected or needed. And that, of course, is why we promptly changed our monetary policy stance as we did, cutting interest rates by 2% to 5½% in the space of five months. In doing so, we have demonstrated that the inflation target is – as we have frequently said it is – symmetrical, so that we would be at least as determined and aggressive in cutting rates if we thought we were likely to undershoot the inflation target as we had been earlier in raising rates to avoid an overshoot of the inflation target. So, where do we go from here? I would strongly advise you to regard anyone who claims to know with any great certainty where we go from here with the gravest possible suspicion. Forecasting the economy is very definitely an art rather than a science – though some artists craft their work rather more carefully than others.

I believe that the best we can do, at least at this stage, is to pay close attention to incoming data in the forecasting process, and examine how consistent they are with historical relationships. We have to deal more successfully with the fact that forecasts of economic developments can never be completely accurate and still allow monetary policy to be forward looking. Final words Let me now conclude. When discussing financial and monetary stability, we must remember that we have come a long way. The world economy shows strong growth coupled with low inflation and monetary policy has contributed to this development. However, there are interesting, though somewhat difficult, challenges ahead that must be met if we are to preserve this bright picture of the world economy. BIS Review 65/2000  6