This document summarizes a speech given by William White about the search for efficiency in the financial world and its potential consequences. The speech discusses how deregulation and new technologies aimed at increasing efficiency in real economies, financial markets, and monetary policy have helped lower inflation and volatility but may have also contributed to growing financial imbalances. These imbalances, as seen in issues like high credit growth, rising asset prices, and sectoral debt levels, have historically led to economic "headwinds." The current financial market turmoil stemming from the subprime crisis reflects some of these underlying issues and has significant implications for financial participants, the broader financial system, and the global economy.
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2008 03 white presentation at dexia istanbul 13 march 2008[1] [mode de compatibilité]
1. Has the search for efficiency made the financial world
less safe?
William R White
Head, Monetary and Economic Department
Bank for International Settlements, Basel
Istanbul, 13 March 2008
Money does not perform. People do.
2. subtitle
Overview
The search for efficiency
As good as it gets?
Could financial imbalances lead to “headwinds”?
Current financial turbulence
Conclusion
2
3. The search for efficiency
subtitle
In the real economy
In financial markets
In the conduct of monetary policy
3
4. Efficiency in the real economy
subtitle
Deregulation in industrial economies
Productivity and IT
Transition economies and globalisation
A disinflationary bias?
4
5. Efficiency in financial markets
subtitle
Deregulation and technology
Risk decomposition and risk management
New products and new players
Cheaper and better services
5
7. Efficiency in the conduct of monetary policy
subtitle
More focus on near-term price stability
More reliance on market processes
More attention to communication
7
8. As good as it gets?
subtitle
Lower and less volatile inflation
Higher and less volatile growth
More resilience to shocks
8
9. Could financial imbalances lead to “headwinds”?
subtitle
1, 2, 3, …?
Efficiencies on the real side keep inflation down
More efficient central banks conclude all is well
More efficient financial markets overreach and imbalances build up
9
10. Could financial imbalances lead to “headwinds”?
subtitle
Credit growth
Asset prices
Sectoral imbalances
Headwinds in history
10
11. Credit growth
subtitle
Low real interest rates and the Wicksellian natural rate
Rapid credit growth globally
The particular case of China
11
26. Boom-bust cycles in historical perspective
subtitle
Why history still matters
Historical examples
And all without inflation
26
27. Current financial turbulence: subprime as “catalyst”
subtitle
Implications of the securitisation revolution for participants
Implications for the financial system as a whole
Implications for the broader economy
27
28. Implications for participants; households
subtitle
Easier and cheaper access to mortgage credit
More options, especially variable rates
Intertemporal smoothing BUT
Choice requires more judgement
More exposure to market swings
28
29. Implications for participants; originators and banks
subtitle
Greater risk diversification
Normally more sources of liquidity BUT
Less need for “due diligence”
Difficulties in valuing complex products
Failure to price liquidity adequately
29
31. Implications for the financial system as a whole
subtitle
Risk transferred to those who can manage it OR
To the most gullible and the most greedy?
Everyone becomes suspect
And the demand for liquidity soars
31
34. Implications for the broader economy
subtitle
Will current turmoil result in credit rationing?
How vulnerable is the global economy?
Is the global housing sector of particular concern?
And what about the dollar?
34
35. Conclusion
subtitle
Current financial turbulence has deep roots
The boy who cried wolf!
How a “better” financial system can still be improved
Implications for monetary and regulatory policy
35