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Credit Crises and the Shortcomings of Traditional Policy Responses

  • William R. White
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    Economic downturns which have their roots in preceding credit excesses and debt overhang have tended historically to be long lasting, whether the financial sector remained healthy or not. There are no good reasons to believe the current global crisis will be any different. Moreover, it is argued in this paper that the policy responses to the crisis to date, both macroeconomic and structural, will not succeed in restoring sustainable growth. Monetary and fiscal stimulus might raise aggregate demand in the short run, but they contribute to higher debt levels which are already working increasingly in the opposite direction. Structural policies intended to maintain pre crisis production patterns, both in the financial and industrial sectors, ignore the unsustainability of those structures in the first place. Alternative policies are needed to meet the G 20’s goal of “strong, sustainable and balanced growth”. They include more international cooperation between creditor and debtor countries (on both exchange rates and production structures), more recourse to explicit debt restructuring (for both households and sovereigns), and structural polices to raise potential growth and make debts more sustainable. Unfortunately, there remain formidable practical and political obstacles to pursuing such policies. Future debt crises of the current magnitude could be avoided by using monetary, macro prudential and fiscal policies more symmetrically over the business cycle. Relative to past behaviour, this would imply more vigorous resistance to credit financed upswings, and a greater willingness to accept the cleansing effect of minor downswings. Policies to ensure financial stability are important but secondary. Les crises de crédit et les insuffisances des interventions publiques traditionnelles D'un point de vue historique, les récessions économiques qui trouvent leur origine dans des excès en matière de crédit et des phénomènes de surendettement tendent à s'inscrire dans la durée, que le secteur financier reste sain ou non. Il n'existe aucune bonne raison de penser que la crise mondiale actuelle diffère en quoi que ce soit de ce schéma. En outre, nous faisons valoir dans ce document que les mesures prises à ce jour par les pouvoirs publics face à la crise, tant sur le plan macroéconomique que structurel, ne permettront pas de revenir à une croissance durable. Les mesures de relance monétaire et budgétaire peuvent certes renforcer la demande globale à court terme, mais elles contribuent à alourdir une dette qui exerce déjà un effet inverse de plus en plus fort. Quant aux mesures structurelles destinées à préserver les structures de production d'avant la crise, tant dans le secteur financier que dans l'industrie, elles ne tiennent pas compte du fait que ces structures n'étaient pas viables à l'origine. D'autres mesures s'imposent pour atteindre l'objectif de « croissance forte, durable et équilibrée » défini par le Groupe des Vingt (G20). Elles peuvent notamment prendre la forme d'une coopération internationale accrue entre pays débiteurs et créanciers (tant en matière de taux de change que de structures de production), d'un recours plus poussé à des formes explicites de restructuration de la dette (tant pour les ménages que pour les emprunteurs souverains), ainsi que de mesures structurelles destinées à rehausser la croissance potentielle et à renforcer la viabilité des dettes. Malheureusement, la mise en oeuvre de telles mesures reste entravée par des obstacles pratiques et politiques considérables. Nous pourrions éviter de futures crises de la dette d'une ampleur similaire à celle que nous connaissons aujourd'hui en utilisant les politiques monétaire, macro prudentielle et budgétaire de manière plus symétrique sur la durée du cycle économique. Par rapport aux comportements antérieurs, cela impliquerait une résistance plus vigoureuse aux phases d'expansion financées par le crédit, et une plus grande disposition à accepter l'effet d'assainissement des phases de contraction légère de l'activité. Les mesures destinées à garantir la stabilité financière sont certes importantes, mais secondaires.

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    Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 971.

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    Date of creation: 07 Jun 2012
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    Handle: RePEc:oec:ecoaaa:971-en
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    1. Carmen M. Reinhart & Vincent R. Reinhart, 2010. "After the fall," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 17-60.
    2. Camilo E Tovar, 2008. "DSGE models and central banks," BIS Working Papers 258, Bank for International Settlements.
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    8. Claudio Borio & Bent Vale & Goeth von Peter, 2010. "Resolving the financial crisis: are we heeding the lessons from the Nordics?," BIS Working Papers 311, Bank for International Settlements.
    9. Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2010. "The future of public debt: prospects and implications," BIS Working Papers 300, Bank for International Settlements.
    10. Robert J. Shiller & Allan N. Weiss, 1994. "Home Equity Insurance," Cowles Foundation Discussion Papers 1074, Cowles Foundation for Research in Economics, Yale University.
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    14. William R. White, 2006. "Is price stability enough?," BIS Working Papers 205, Bank for International Settlements.
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