BofE's Haldane Sees Greater Volatility Ahead; Warns Of Too-Big-Too-Fail "Problem From Hell"
While the Bank of England's chief economist, Andrew Haldane, admitted that reviving investors’ appetite for risk was one of the forgotten goals of central banks, he notes there are concerns that risk is not being "removed" but changing shape and migrating to more liquid markets but that should not be a problem as "monetary policy can on occasions have a role to play in ensuring against these financial stability risks..." i.e. the market put. His biggest concern is the aggregation of derivatives clearing which could be a "problem from hell" but he notes the future will not be the same as the past as "volatility in financial-market asset prices will be somewhat greater," and that interest rates will not 'normalize' to the levels of the past.
Some key excerpts from Andy Haldane's speech today at Camp Alphaville,
We blew the bubbles...
"That’s why we did it. Lower rates and QE were an exercise in, among other things, trying to stimulate risk taking."
The economic cost of inaction would have been considerable, he argued.
But, as WSJ reports, he appears to be concerned...
Critics say these tools may be ineffective, particularly if risky activity migrates into shadowy parts of the financial system beyond regulators’ reach.
Mr. Haldane acknowledged this was a possibility and said central banks must be prepared to use higher interest rates as part of their defenses.
The future won't look like the past...
“The level of rates to which we are returning won’t be the numbers we’ve seen in the past”
As "risk" is rising...
"What we’re seeing in financial markets “isn’t risk being somehow removed or obliterated, we’re seeing risk change shape”
Risk is migrating off the balance sheets of banks and onto the balance sheets of non-banks in the form of market liquidity risk, Haldane says
"We’re now moving to a world where more of that risk “shows up on the mark-to-market balance sheets of asset managers and other funds,” he says
And volatility will pick up...
“That will mean on average that volatility in financial-market asset prices will be somewhat greater than in the past”
ut Central Banks can contain it...
“Monetary policy can on occasions have a role to play in ensuring against these financial stability risks, not as a first line of defense”
“There are other things that can and would be done as a first line of defense if we thought financial markets were detaching themselves too materially from fundamentals”
But there are other problems...
Excess agglomeration of CCPs [derivative clearing houses] "would cause the too-big-to-fail problem from hell"
* * *
Quite a different level of honesty than the bullshit Yellen spewed this morning of the US utopia of goldilocks growth and inflation forecasts.
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