William White — a 66-yr-old top Canadian economist who worked for various central banks for almost 40 years, most recently serving as chief economist of the Bank for International Settlements (BIS), headquartered in Basel, Switzerland — is the guy that predicted the current financial crisis years before 2007’s subprime meltdown with almost frightening accuracy. But central bankers ignored his advise preferring to listen to his great rival Alan Greenspan instead, with devastating consequences for the global economy.
White recognized the brewing disaster. The analysis department at the BIS has a collection of data from every bank around the globe, considered the most impressive in the world. It enabled the economists working in this nerve center of high finance to look on, practically in real time, as a poisonous concoction began to brew in the international financial system.
White and his team of experts observed the real estate bubble developing in the United States. They criticized the increasingly impenetrable securitization business, vehemently pointed out the perils of risky loans and provided evidence of the lack of credibility of the rating agencies. In their view, the reason for the lack of restraint in the financial markets was that there was simply too much cheap money available on the market. To give all this money somewhere to go, investment bankers invented new financial products that were increasingly sophisticated, imaginative — and hazardous.
As far back as 2003, White implored central bankers to rethink their strategies, noting that instability in the financial markets had triggered inflation, the “villain” in the global economy. “One hopes that it will not require a disorderly unwinding of current excesses to prove convincingly that we have indeed been on a dangerous path,” White wrote in 2006.
In August 2003 White gave a speech in Jackson Hole in Wyoming, a kind of Mecca for financial experts, where he warned of the dangers the global economy was facing and prophesied that if the “worst scenario materializes, central banks may need to push policy rates to zero and resort to less conventional measures, whose efficacy is less certain.”
[White] warned that the money supply could dry up. Markets, he wrote, “can freeze under stress, as liquidity evaporates.” He also identified — a full four years before the bursting of the real estate bubble — the disturbing developments in the US real estate market as a consequence of lax monetary policy.“Further stimulus has not come free of charge and has raised questions about the sustainability of the recovery,” he warned. From today’s perspective, White’s predictions [have been proved right to an almost apocalyptical degree.]
That speech fell of course on deaf ears because its theories had absolutely nothing in common with Greenspan’s worldview, or that of most of his colleagues….Fascinating article.
Graph from Spiegelonline (click to enlarge):
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