Breakfast with Bollard

On Friday I was very fortunate to be invited by the ASB Bank to attend a breakfast presentation by Alan Bollard (Reserve Bank Governor) who was fresh from delivering the Monetary Policy Statement the previous day. Bollard was humourous in his presentation and able to explain the concerns he has about the world economy at this time and its impact on New Zealand. As mentioned in the statement the day before, the banks in NZ have plenty of liquidity and with credit growth ailing there is not the compulsion to access funds from overseas markets. There were some salient points from the presentation:

1. According to the BIS (Bank for International Settlements) the longer-term lesson is that, to build the fiscal buffer required to address extraordinary events, governments should keep debt well below the estimated thresholds. Beyond a certain level of debt (government and household) it starts to have a negative effect on growth. When corporate debt goes beyond 90% of GDP, it becomes a drag on growth. And for household debt, the threshold is around 85% of GDP.

2.Economies, such as New Zealand, that are performing well have a better-capitalised banking sector. But these economies also featured a low level of financial openness and less exposure to US creditors.

3. As mentioned in an earlier post – US Economy: Great Depression, Great Recession, Great Contraction – Which one? – Bollard alluded to the work by Harvard economist Kenneth Rogoff in his co-authored book entitled “This Time Is Different: Eight Centuries of Financial Folly”. In a typical recession the economy returns to pre-recession growth within a year and in most cases catches up to its rising long-run trend. The repercussions of the financial crisis typically can take 4 years just to reach the same per capita income level that it had attained at its pre-crisis peak. In his press conference on Thursday he used the Hebrew proverb “He who eats till he is sick, must fast till he is well”. The graph below supports Rogoff’s view in that high levels of unemployment is what typically follows a credit crisis simlar to 2007.

4. With any financial crisis ‘we can run but can’t hide’. In Europe banks prefer to deposit their money with the European Central Bank (ECB), even with low interest rates, rather than lend to each other. There is concern that Greece will default and therefore trigger contagion in markets which will affect us all.

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