William White insisted in an interview with Central Banking Journal that the current status of the trans-Atlantic banking systems is again just like that of 2006-07, before the crash...
William White, chairman of the Economic and Development Committee of the OECD, insisted in an interview with Central Banking Journal that the current status of the trans-Atlantic banking systems is again just like that of 2006-07, before the crash.
"Financial conditions today look very similar to the way they looked in 2007, which is, you've got a world in which asset prices have been bid up to very, very high levels, particularly equity prices. The whole nexus of QE and very low interest rates encourages certain activities such as momentum trading. When you look back at 2007, conditions seem similar to today. Equity prices were at very high levels, corporate spreads were at very low levels and sovereign spreads were at record lows. The Vix [volatility index] was also at a record low, indicating there is enormous certainty about what's going to happen; the good times will roll forever.
"So you could take on a very risky position and then lay it off at a very low cost; all of this was consistent with money out there looking for some place to go and in 2013, we're looking at something very similar."
Q: "So we are in a similar situation to 2007?"
"Before the talk of tapering and the pull-back from the emerging markets, the behaviour in the financial markets was really very similar to what we'd seen before. Lending standards, with cov-lite loans [loans with no required payment schedules] for corporations and subprime mortgages, had gone down enormously in the lead-up to the crisis. The bottom-line was that huge numbers of people were getting money that they never would have gotten before. And you see the cov-lite coming back again."
Asked if the hyperinflationary printing policies of central banks have not had some economic benefit, White responded: "If what you're interested in is what the G-20 described as strong, sustainable and balanced growth, you could hardly say we've achieved it.... If you add up the debt of governments, households and corporates in the G-20, they are now 30% higher than they were when the crisis began. So there does not appear to be much of the deleveraging you usually see in response to a crisis." In fact, White explained, the money-printing has enabled the major banks to "evergreen" — permanently keep alive on their books — dead loans, never to be repaid, and dead securities corporations and subdivisions.
White is a former department head at the Bank for Internaional Settlements (BIS), and economist at the Bank of England.
