Chief Economist Of Central Banks' Central Bank: "It's Extremely Dangerous... I See Speculative Bubbles Like In 2007"

Tyler Durden's picture

Yet again, it seems, once senior political or economic figures leave their 'public service' the story changes from one of "you have to lie, when it's serious" to a more truthful reflection on reality. As Finanz und Wirtschaft reports in this great interview, Bill White - former chief economist of the Bank for International Settlements (who admittedly has been quite vocal in the past) - warns of grave adverse effects of the ultra loose monetary policy everywhere in the world... "It all feels like 2007, with equity markets overvalued and spreads in the bond markets extremely thin... central banks are making it up as they go along." Some very uncomfortable truths in this crucial fact-based interview.


Via Finanz Und Wirtschaft,

William White is worried. The former chief economist of the Bank for International Settlements is highly sceptical of the ultra loose monetary policy that most central banks are still pursuing. "It all feels like 2007, with equity markets overvalued and spreads in the bond markets extremely thin", he warns.

Mr. White, all the major central banks have been running expansive monetary policies for more than five years now. Have you ever experienced anything like this?

The honest truth is no one has ever seen anything like this. Not even during the Great Depression in the Thirties has monetary policy been this loose. And if you look at the details of what these central banks are doing, it’s all very experimental. They are making it up as they go along. I am very worried about any kind of policies that have that nature.

But didn’t the extreme circumstances after the collapse of Lehman Brothers warrant these extreme measures?

Yes, absolutely. After Lehman, many markets just seized up. Central bankers rightly tried to maintain the basic functioning of the system. That was good crisis management. But in my career I have always distinguished between crisis prevention, crisis management, and crisis resolution. Today, the Fed still acts as if it was in crisis management. But we’re six years past that. They are essentially doing more than what they did right in the beginning. There is something fundamentally wrong with that. Plus, the Fed has moved to a completely different motivation. From the attempt to get the markets going again, they suddenly and explicitly started to inflate asset prices again. The aim is to make people feel richer, make them spend more, and have it all trickle down to get the economy going again. Frankly, I don’t think it works, and I think this is extremely dangerous.

So, the first quantitative easing in November 2008 was warranted?


But they should have stopped these kinds of policies long ago?

Yes. But here’s the problem. When you talk about crisis resolution, it’s about attacking the fundamental problems that got you into the trouble in the first place. And the fundamental problem we are still facing is excessive debt. Not excessive public debt, mind you, but excessive debt in the private and public sectors. To resolve that, you need restructurings and write-offs. That’s government policy, not central bank policy. Central banks can’t rescue insolvent institutions. All around the western world, and I include Japan, governments have resolutely failed to see that they bear the responsibility to deal with the underlying problems. With the ultraloose monetary policy, governments have no incentive to act. But if we don’t deal with this now, we will be in worse shape than before.

But wouldn’t large-scale debt write-offs hurt the banking sector again?

Absolutely. But you see, we have a lot of zombie companies and banks out there. That’s a particular worry in Europe, where the banking sector is just a continuous story of denial, denial and denial. With interest rates so low, banks just keep evergreening everything, pretending all the money is still there. But the more you do that, the more you keep the zombies alive, they pull down the healthy parts of the economy. When you have made bad investments, and the money is gone, it’s much better to write it off and get fifty percent than to pretend it’s still there and end up getting nothing. So yes, we need more debt reduction and more recapitalization of the banking system. This is called facing up to reality.

Where do you see the most acute negative effects of this monetary policy?

The first thing I would worry about are asset prices. Every asset price you could think of is in very odd territory. Equity prices are extremely high if you at valuation measures such as Tobin’s Q or a Shiller-type normalized P/E. Risk-free bond rates are at enormously low levels, spreads are very low, you have all these funny things like covenant-lite loans again. It all looks and feels like 2007. And frankly, I think it’s worse than 2007, because then, it was a problem of the developed economies. But in the past five years, all the emerging economies have imported our ultra-low policy rates and have seen their debt levels rise. The emerging economies have morphed from being a part of the solution to being a part of the problem.

Do you see outright bubbles in financial markets?

Yes, I do. Investors try to attribute the rising stock markets to good fundamentals. But I don’t buy that. People are caught up in the momentum of all the liquidity that is provided by the central banks. This is a liquidity driven thing, not based on fundamentals.

So are we mostly seeing what the Fed has been doing since 1987 – provide liquidity and pump markets up again?

Absolutely. We just saw the last chapter of that long history. This is the last of a whole series of bubbles that have been blown. In the past, monetary policy has always succeeded in pulling up the economy. But each time, the Fed had to act more vigorously to achieve its results. So, logically, at a certain point, it won’t work anymore. Then we’ll be in big trouble. And we will have wasted many years in which we could have been following better policies that would have maintained growth in much more sustainable ways. Now, to make you feel better, I said the same in 1998, and I was way too early.

What about the moral hazard of all this?

The fact of the matter is that if you have had 25 years of central bank and government bailout whenever there was a problem, and the bankers come to appreciate that fact, then we are back in a world where the banks get all the profits, while the government socializes all the losses. Then it just gets worse and worse. So, in terms of curbing the financial system, my own sense is that all of the stuff that has been done until now, while very useful, Basel III and all that, is not going to be sufficient to deal with the moral hazard problem. I would have liked to see a return to limited banking, a return to private ownership, a return to people going to prison when they do bad things. Moral hazard is a real issue.

Do you have any indication that the Yellen Fed will be different than the Greenspan and Bernanke Fed?

Not really. The one person in the FOMC that was kicking up a real fuss about asset bubbles was Governor Jeremy Stein. Unfortunately, he has gone back to Harvard.

The markets seem to assume that the tapering will run very smoothly, though. Volatility, as measured by the Vix index, is low.

Don’t forget that the Vix was at record low in 2007. All that liquidity raises the asset prices and lowers the cost of insurance. I see at least three possible scenarios how this will all work out. One is: Maybe all this monetary stuff will work perfectly. I don’t think this is likely, but I could be wrong. I have been wrong so many times before. So if it works, the long bond rates can go up slowly and smoothly, and the financial system will adapt nicely. But even against the backdrop of strengthening growth, we could still see a disorderly reaction in financial markets, which would then feed back to destroy the economic recovery.


We are such a long way away from normal long term interest rates. Normal would be perhaps around four percent. Markets have a tendency to rush to the end point immediately. They overshoot. Keynes said in late Thirties that the long bond market could fluctuate at the wrong levels for decades. If fears of inflation suddenly re-appear, this can move interest rates quickly. Plus, there are other possible accidents. What about the fact that maybe most of the collateral you need for normal trading is all tied up now? What about the fact that the big investment dealers have got inventories that are 20 percent of what they were in 2007? When things start to move, the inventory for the market makers might not be there. That’s a particular worry in fields like corporate bonds, which can be quite illiquid to begin with. I’ve met so many people who are in the markets, thinking they are absolutely brilliantly smart, thinking they can get out in the right time. The problem is, they all think that. And when everyone races for the exit at the same time, we will have big problems. I’m not saying all of this will happen, but reasonable people should think about what could go wrong, even against a backdrop of faster growth.

And what is the third scenario?

The strengthening growth might be a mirage. And if it does not materialize, all those elevated prices will be way out of line of fundamentals.

Which of the major central banks runs the highest risk of something going seriously wrong?

At the moment what I am most worried about is Japan. I know there is an expression that the Japanese bond market is called the widowmaker. People have bet against it and lost money. The reason I worry now is that they are much further down the line even than the Americans. What is Abenomics really? As far as I see it, they print the money and tell people that there will be high inflation. But I don’t think it will work. The Japanese consumer will say prices are going up, but my wages won’t. Because they haven’t for years. So I am confronted with a real wage loss, and I have to hunker down. At the same time, financial markets might suddenly not want to hold Japanese Government Bonds anymore with a perspective of 2 percent inflation. This will end up being a double whammy, and Japan will just drop back into deflation. And now happens what Professor Peter Bernholz wrote in his latest book. Now we have a stagnating Japanese economy, tax revenues dropping like a stone, the deficit already at eight percent of GDP, debt at more than 200 percent and counting. I have no difficulty in seeing this thing tipping overnight into hyperinflation. If you go back into history, a lot of hyperinflations started with deflation.

Many people have warned of inflation in the past five years, but nothing has materialized. Isn’t the fear of inflation simply overblown?

One reason we don’t see inflation is because monetary policy is not working. The signals are not getting through. Consumers and corporates are not responding to the signals. We still have a disinflationary gap. There has been a huge increase in base money, but it has not translated into an increase in broader aggregates. And in Europe, the money supply is still shrinking. My worry is that at some point, people will look at this situation and lose confidence that stability will be maintained. If they do and they do start to fear inflation, that change in expectations can have very rapid effects.

The Swiss National Bank has increased its balance sheet the most in relation to Swiss GDP. Should the Swiss be worried?

Yes, I do think you should be concerned. But at the same time, remind you, what you have here is a very different beast from what you are seeing in other countries. The SNB has not increased base money because they wanted to pump up the economy, but to prevent the Swiss Franc from appreciating too much. And that was not a monetary, but a political decision. I would say barring some major shocks outside, what they have done was the right thing to do and highly successfully implemented. But you cannot deny the arithmetics that the balance sheet is huge, much of it in foreign currency, and if something bad happens outside, and then Switzerland will look like a refuge again, the pressure on the Franc will be huge.

While that policy is in place, Swiss domestic interest rates are too low. Should the SNB be worried about a real estate bubble?

Yes, absolutely. You are caught between a rock and a hard place. To prevent the Franc from going up, you have to introduce too easy monetary policy, and you don’t like that either. So the SNB has to introduce macroprudential measures, trying to cool off the real estate market. That’s the right thing to do, because housing tends to be the big thing that goes wrong when you have too easy financial conditions.

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fonzannoon's picture

White concluded the interview by shooting himself in the face 17 times with a nail gun while falling down an embankment

LetThemEatRand's picture

At least he didn't kill his family.  The weren't home, apparently.

icanhasbailout's picture

in 2007 they didn't see speculative bubbles

bear was fine

lehman was fine

subprime is contained

housing is not in a bubble

straight from the high priests of modern finance


fonzannoon's picture

this time they see bubbles everywhere apparently.

spine001's picture

My only question is how low will they let the market go before the FOMC intervenes through POMO operations. I'm willing to bet that they will reset it to the lowest values of 2014 and not lower than that.

Pinto Currency's picture


The BIS coordinates rigging the gold price and wild money printing for a couple of decades and now one of them is worried about bubbles and moral hazard.

A good name for a magazine interviewing central bankers would be Finance und Witchcraft.

free_lunch's picture



money = debt

So the only solution is to abandon money or stop issuing it as debt owned to central banks.

If not, central banks will keep collecting this "debt" by taking private property and private savings, a practice which this man is advocating here. As so many economists do.

You have two kind of economists both working for the same team/outcome. They disguise as enemies, but they are on the same team working towards the unavoidable only possible outcome:

- You have the ones that preach spending and borrowing (giving governments and people more rope)

- You have the ones that preach stop borrowing and start paying back (hang them with the rope that was provided by the above)

People that support either on of these, are supporting and defending the system.

What else is paying back government debt than taxing people out of their wealth to transfer the fruit of their labor to the central bankers?

The social spendings are only a distraction that gets the attention away from the core of the problem. People fighting over these spending issues is a perfect example of "divide and rule"

The system is designed with a flaw/feature that assures there is always more debt then there is money, so the debt CANNOT be payed ever. As long as people keep discussing these debts as if they can be payed back, they are responsible for keeping this crazy system in place.

Papasmurf's picture

You really shouldn't listen to Cramer.

syntaxterror's picture

"I see dead bankers"

Two-bits's picture

"At the moment I am most worried about Japan"

How many here have said Japan would lead the charge to the bottom of the abyss?


"Now we have a stagnating Japanese(read American) economy...If you go back into history, a lot of hyperinflations started with deflation."

Fixed it. 

Not Too Important's picture

Well, there is Kyle something . . .

Chuck Knoblauch's picture

Did someone just put the cheese back on his cracker?

LetThemEatRand's picture

He's advocating for putting the toothpaste back in the tube, so may as well throw in some cheese.

Cattender's picture

no way there are any Bubbles..

ebworthen's picture

So was the Bank of International Settlements petitioning Central Banks five years ago to not engage in counterproductive easing and bailouts of failed banks/corporations/insurers?

If not, STFU and send me my tax free check for $3 million.

fonzannoon's picture

White is correct. QE was necessary to put a floor under the market until we sentenced all those bankers to jail and collapsed the banks into a new system and slashed the entitlement system which allowed us to cut the debt etc. But since that is all done now, we really are just going overboard with policy and when we exit this whole thing, it could cause a 5-7% pullback. It will be painful, but we will get through it. Together. Vomit.

McMolotov's picture

Totally unrelated, but I just looked at the web address for this article and thought it said something about "Bisex chief."

Legolas's picture

I need to walk away for a bit.  Just TMI out there !

I tripped over a youtube video (over 600,000 views) of a woman describing how Moooooochelllle simply cannot be a female.  I'm not ever going to be able to look at her the same again.

Keyser's picture

It's a real eye opener, init...  One you start seeing Moochie / Michael in the proper context, it all makes sense...



Legolas's picture

It's just so whacked out.  I'm so thankful that I haven't found her to be attractive! ROFLMAO.  Can you imagine the two of them making a grand revealing on his and his last day in Mordor, after they have completely wrecked the country?  That would be simply poetic.  Ole Saul Alinsky has to be so proud of his A+ student.

bdub2's picture

Check Good Will White's bio on wiki. Or don't. I'll Cliff's Note it:

Bro met with Satan One---er Dr. Grease-pan back in '03, and told homecheese to cut it out. Greenie was all like,"You trippin' dog, ain't no thang."


William-I-Am-Not-a-money-printing-douchebag-White even accurately called for serious alarm and action in 1998.

This interview should be one of the most alarming given proven historic ability and the non-pussy footing way of telling it like it is, from someone On-High.

Now I, ignore it, and btfd asap pdk.

ps: fyb

Yen Cross's picture

       The parasites are running out of hosts...

resurger's picture


ali-ali-al-qomfri's picture

Stockberg dead ahead....

buzzsaw99's picture

Normal rates are 4%? Wow what a crock. With no QE rates go to double digits overnight. What he means by normal rates is rates that are rigged by the fed but at what he thinks should be normal. Go die asshole.

spine001's picture

No buzzsaw99, normal rates are historic, they come from the rate of growth of cattle. Lets say you lent 100 cows to your son for 2 years, well, when those cows reproduced, you expected him to return to you, your original hundred plus any calfs. Just the law of nature. That rate of growth is around 4 to 7%.

buzzsaw99's picture

did you choose cattle for your example because they are kosher? wouldn't pigs be a better example, or rats? those rats breed exponentially and it is at least a double digit rate, maybe double digits per month. better pay the pied piper bitchez.

PT's picture

No.  Everyone knows you use cows.

And if that is too hard to read, use this one:

(If you can't read the Enron definition on the first link, it is the same as the Royal Bank of Scotland definition in the second link.)

NOTaREALmerican's picture

Just another pinko malcontent pessimist who hates Merica, and the troops.

Not Too Important's picture

'Obama's press secretary decorates home with Soviet propaganda'

America! Fuck yeah!

SheepDog-One's picture

2007 all over again, except this time ALL the solutions have already been used up? Uh oh.

NOTaREALmerican's picture

While we've still got bullshit,  we've got hope!  


Arius's picture

as long as the music plays, myself am up and dancing ... one day at a time .... be optimistic!


argentuman's picture

Not ALL the solutions - we've still got the Doomsday Machine.

starman's picture

no no no Dr Yellen said its the fucking wheater why cant all of you except the truth that its the fucking wether!

Cattender's picture

yes the weather is too Fucking Nice today = NO BUSINESS AT ALL.

Yen Cross's picture

   I would love to see where this guy has his pension fund/sunken treasure hidden?  All too often the scum that enables goes "turncoat"to save their own ass, only to pillage and plunder another day<>

spine001's picture

In farmland, guns, gold and seeds. He said so himself!

Yen Cross's picture

  Planting season is pretty much done. I could use some help painting the deck of my guest-house though?

Mark123's picture

I love reading these comments!  Most times they are far more interesting (and funny) than the articles themselves.


BobRocket's picture

A lot of these comments are are lot closer to the truth than the articles themselves.


If you were in charge and the whole shebang was going to hell in a handcart, would you lie to keep it going for another day or would you tell the truth and watch everything you believed in collapse around you ?



yellencrash's picture

Which is exactly why it will end catastrophically and cataclysmically. And could be happening right now on this grand left supershoulder of the grand superhead filled with grand grandiosity and unprecedented denial. They've denied the cliff on the horizon for so long that they believe their own psychosis. 

ali-ali-al-qomfri's picture

comment on comments section; as a non-conventional blogging forum, weapon (the comment is used as a thrusting (or point) weapon only. Any contact with the side of the comment (a slap or slash) does not result in a green arrow) and so is governed by the rules of priority, also known as right of comment. As such, up arrows are not necessarily awarded to the first blogger to comment or ‘hit’, but to the blogger who comments with a certain priority. Priority is established when one poster starts a correctly executed, appropriate and intelligent statement or comment, attack on the topic of post. An attack which has failed (i.e. has missed the point or been refuted, parried) no longer holds priority. Priority does not automatically pass to the defending commentor, unless the defending poster parries, at which point priority is given to the defending post. Otherwise, at the moment an attack is over, neither poster has priority. Instead, priority is gained by a troll making an offensive irrelevant comment, as is always the case. If the Troll’s comment was parried, the defender has the right to make a riposte, but it must be intelligent and without indecision or delay. In other words if the defending poster parries a comment successfully, but then waits and does not immediately riposte, they lose the right of comment. Alternatively, the poster may initiate his/her own attack if the initial attacking comments are missed. The poster making the original attack may also make a new offensive post or comment, a renewal or remise of the initial attack.

In fight club blogging only actions that arrive with priority are considered, unless only one blogger actually hits. Then priority does not matter; the commentor whose comments brought feeling (good/bad) is awarded a green or red arrow. If the commentor with priority hits off target and the commentor without priority hits on target, then no arrow is awarded. If both commentors hit on target but one made logical sense or is hilarious the other did not, the commentor who had priority is awarded the green arrow.

Indeed the comments are golden.thxZH

Escrava Isaura's picture

Stephanie McMillan, on Capitalism  


It might be tempting to hope that capitalism will collapse on its own. Unfortunately, the system isn’t going to smash itself. Capitalism in crisis becomes even more ruthless.


They no longer even bother to keep up the pretence of caring about the future. Resource depletion and natural disasters aren’t problems for capitalists— in fact, scarcity makes prices and profits soar, and catastrophes are huge investment opportunities.


The only panic that a capitalist feels when contemplating the melting of the Arctic is that he won’t get to the newly uncovered oil first. They don’t care where they get their energy, as long as they control it all.


The system is dynamic, adaptable, and infinitely ruthless. Capitalism will ultimately destroy itself, but only when it’s destroyed all life on the planet, which is too late to matter.


NOTaREALmerican's picture

Yeah,   but I wish you guys wouldn't get so hung up on the word "capitalism".   It's a meaningless word.   The sociopaths run all large organizations, the ISM's exists for the dumbasses to fight over minutiae while the sociopaths screw them. 

Morla's picture

Indeed. Communism is just capitalism with a slightly more specific group of elites making the decisions about capital deployment. Capitalism is just the natural order, we only fight over who gets to call the trades.

Currently the entire world has become a Paul Ryan budget proposal, keep looting the future, because by the time the future becomes the present everything will have magically fixed itself. Don't look any farther than the next election cycle, because nothing past that really matters. And the Fed deliberately enables this line of thinking.

How far is the Fed willing to go in looting the pension funds? You can print money but you can't print capital, how dry will they let the well get before they retreat?