The Great Leveraging

Transcription

1 The Great Leveraging Five Facts and Five Lessons for Policymakers Alan M. Taylor University of Virginia, NBER & CEPR International Banking Conference Federal Reserve Bank of Chicago and CEPR November

2 Fact 1. Crises: Almost forgo4en: now they re back A long standing problem For DM and EM Exception: 1940 to 1970 period unusually quiescent. Why? Internal or external constraints? Percentage of economies in a financial crisis High-income economies Middle- & low-income economies 2

3 Fact 2. Consequences: forgot depressing/deflaconary impacts Evidence-based macroeconomics Event study 14 advanced countries 140 years of data Recessions are painful Those with financial crises are more painful Those with global financial crises are worse still Change in real GDP growth rate 4 year windows before/after recession peak Change in inflation rate 4 year windows before/after recession peak Change in real loan growth rate 4 year windows before/after recession peak Prewar versus Postwar Normal Global Crisis Crisis Normal Prewar Recessions Crisis Postwar Recessions Normal Global Crisis Crisis Normal Prewar Recessions Crisis Postwar Recessions Normal Global Crisis Crisis Normal Prewar Recessions Crisis Postwar Recessions 3

4 Fact 3. Extreme leverage: historically unprecedented Then Age of Money Now How? Age of Credit More leverage Wholesale funding Why? Private actions (recovery from GD/WW2) Government policies (financial liberalizations) ratio Bank Loans/GDP Bank Assets/GDP Broad Money/GDP 4

5 Fact 3. Extreme leverage: banks versus sovereigns Advanced countries Public debt crisis/ excess? There is a post 2008 blip Private credit crisis/ excess? Larger and trending up since 1990 Reversal of ratios striking after 1960 Safe assets? ratio Bank Loans/GDP Public Debt/GDP 5

6 Fact 4. Global asymmetry: EMs buy insurance, DMs sell it Post-1990s EMs switch to safer, countercyclical polices and larger buffers Great Reserve Accumulation Unique phase in history? Gold standard Net capital flows Private inflows Official outflows No Lucas paradox? U.S. $ billion EM Official & Private BOP Account Flows EM Official Flows EM Private Capital Flows U.S. $ billions EM & DM NIIP Account Official Reserves Stocks 1999q12001q12003q12005q12007q12009q1 Emerging markets Developed markets 6

7 Fact 5. Savings glut: short run panic v. long run demography Short term reasons to think the era of cheap capital is over Investment rebound in EM and DM after panic? Not quite yet! EM reserve step change completed? DM delevering slow? Longer term reasons? Demography Offsetting/postponing factor Recurrent and ongoing flights to safety in panic Dependents as a percentage of working age (20 64) World More developed regions Less developed regions Real rate = 0% in Jun 2012! 7

8 Summing up the facts An Inconvenient Truth Crises just a fact of life in modern finance capitalism? Exception was with financial repression, regulation, controls. Period of low credit creation. But it was also still a period of high growth. Plus A Series of Unfortunate Events Cheap capital in asymmetric world. Credit boom. Good = productive projects. Bad = risk of boom-bust cycle. Sequel Hunger for safe assets, demographic shifts slow (but coming). Low real rates for now= deflationary shock continues, and credible sovereigns can be funded. Next What lessons for policy in this kind of financial landscape Macro policy / Financial policy 8

9 Lesson 1: Past private credit growth does contain valuable prediccve informacon about likelihood of a crisis Schularick and Taylor 2012 AER Credit Booms Gone Bust Use lagged credit growth T 5,..,T 1 Forecast of a financial crisis {0,1} in year T Ex ante credit boom makes a financial crisis more likely Beats null (cointoss) Beats narrow or broad money Robust to other controls including macro, interest rates, and stock prices True positive rate True negative rate Null, FE only (AUC = 0.640) Credit + FE (AUC = 0.750) Money + FE (AUC = 0.686) Reference 9

10 Lesson 2: External imbalances/public debts are a distraccon Jordà, Schularick, Taylor 2011 IMF Economic Review Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons Couldn t it all be down to external imbalances rather than internal? Add current account (%GDP) to the forecast system and run a horse race. As a policymaker, which signal has more valuable information about incipient financial fragility? Not CA/GDP Same result holds for public debt/gdp True positive rate True positive rate True negative rate Null, FE only (AUC = 0.641) Credit + FE (AUC = 0.750) CA + FE (AUC = 0.685) Credit + CA + FE (AUC = 0.767) Reference True negative rate Null, FE only (AUC = 0.638) Credit + FE (AUC = 0.745) Pub. debt + FE (AUC = 0.645) Credit + pub. debt + FE (AUC = 0.747) Reference 10

11 Lesson 3: AQer a credit boom, expect a more painful recession, normal or financial- crisis Credit boom before v lost output afterwards Jordà, Schularick, Taylor 2012 When credit bites back Larger credit boom ex ante correlates with deeper recessions in each case In addition to the larger credit boom making more painful financial crisis case more likely to occur Normal recessions Financial recessions Level of log real GDP per capita in year 1-5, orthogonal component coef = , se = , t = Level of log real GDP per capita in year 1-5, orthogonal component coef = , se = , t = Excess credit in prior expansion, orthogonal component Excess credit in prior expansion, orthogonal component 11

12 Lesson 4: In a financial crisis with large run- up in private sector credit, mark down growth/inflacon more Credit boom before v other outcomes Jordà, Schularick, Taylor 2012 When credit bites back Larger credit boom ex ante correlates with deeper recessions in each case In addition to the larger credit boom making more painful financial crisis case more likely to occur Also depressing for investment and inflation outcomes Real GDP per capita Cumulative Change From the Start of the Recession Real Investment per capita CPI Prices Normal Financial

13 Lesson 5: In a financial crisis with large public debt, and large run- up in private sector credit mark down growth/ inflacon even more JST, work in progress Zero reference = no treatment Blue = normal recession after +1% extra credit/ GDP ppy treatment Red = financial recession after +1% extra credit/ GDP ppy treatment Lt gray = Blue line path as public debt/gdp vary from 0% to 100% Percent Change in growth rate in each year after start of recession Real GDP per Capita Years Financial: Debt/GDP = 0% Normal: Debt/GDP = 0% Normal: Debt/GDP = 50% Financial: Debt/GDP = 50% Normal: Debt/GDP = 100% Financial: Debt/GDP = 100% Normal recession: Debt/GDP = 50% Financial crisis recession: Debt/GDP = 50% Normal recession: Debt/GDP = 0 100% Financial crisis recession: Debt/GDP = 0 100% Dk gray = Red line path public debt/gdp vary from 0% to 100% 13

14 Summing up the lessons Pre-crisis prevention Central bank complacency, with two obvious and key failures Inflation targeting not enough, unable to avert credit boom/bust crisis Didn t we know this already from history of the gold standard, etc.? Not having well thought out banking supervision/resolution, LOLR regime Ditto Both failures present with a vengeance in the Eurozone with amplification factors Post-crisis response What will the path look like? Worse than people thought/think Massive deflationary shock; CBs beware of premature tightening ECB rate rise in 2011? Fed/BoE/BoJ responses more accomodative, but large headwinds also 14

15 The Great Leveraging Five Facts and Five Lessons for Policymakers Alan M. Taylor University of Virginia, NBER & CEPR International Banking Conference Federal Reserve Bank of Chicago and CEPR November