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Good afternoon and welcome to the seventh and penultimate session from the Oxford Martin School joint

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with the Oxford Review of Economic Policy and the Smith School on the economics of the KOVA 19 pandemic.

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We had a fascinating discussion last week about the impacts of the pandemic on GENDA with Professor Sarah Smith and Almudena Syria.

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And today I'm delighted to welcome Dr Yearly Accuser from the Bank of England to talk about a tale of two crises coping 19 in the financial system.

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Now, this is an economic and a financial crisis, and we had one of those just over 10 years ago.

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Have we learnt anything? That's what we're going to find out about today. And Julia's brilliantly positioned to take us through that.

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She's written a paper you can see there at the bottom of your screen.

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You can click to go onto it joint with and it them who is the chief economist of the Bank of England.

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Julia is very well credentialed here. She's had a stint at Lehman Brothers before the crisis.

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I should say the Financial Times has had now 12 years almost.

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I think the Bank of England looking at these sorts of issues as the head of international surveillance.

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So she's basically responsible for having identified anything that might go wrong in the global economy.

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And if she didn't see it well and we all go down, it's her fault.

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So she's beautifully positioned. Yeah. She has a doctorate in economics from Nuffield at Oxford.

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So it will credential there as well. So you're just gonna just tell us a little bit about her paper and the differences in preparation,

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I guess, of the central banking and the financial system this time compared with the last crisis.

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And then I'm very much looking forward to getting into the nitty gritty conversation with you live.

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The floor is yours. Thank you very much, Kam, and it's a pleasure to be here.

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I should start with a quick disclaimer. What I say on my own views, not those of the Bank of England or its committees, as you might expect.

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And as Ken said, I will start with a few remarks based on my paper with any holding that looks set to

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the to crisis to the global financial crisis and the current Kofod induced crisis.

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Now, of course, the current crisis is very much ongoing and the future outlook will very much

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depend on how the pandemic pans out and indeed what healthcare can do about that.

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But we can draw early lessons, in my view. And what I will focus on in my remarks is the banking system and the lessons we can we can we can not learn

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from the previous crises and what what we have not seen and current crises relative to the 2008 crisis.

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So while over 19 has caused a global collapse in activities and that too many job

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losses we have not seen is the financial system or at least banks collapsing.

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Indeed, they have supported the really and the real economy, as I will argue.

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And this is in stark contrast to what we saw over a decade ago when banks were in deep trouble during the global financial crisis.

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You will recall that Lehman Brothers in 2008, a U.S. investment bank collapsed.

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But earlier rumblings were also visible in the UK with queues forming outside Northern Rock with people worried about getting their money back.

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Say, a decade ago, banks were at the epicentre of the crisis and indeed, they were the key, the key cause of the crisis, but also the key catalyst.

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And banks in many countries, including in the UK, had to be bailed out with taxpayers money.

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And I just started work at the Bank of England in 2008.

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Analysing past banking crises was all the rage, as I can tell you.

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But let me start by looking at what went wrong.

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Then before we discussed some reforms and then come back to the current shock, the shock and some early lessons from that.

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So with hindsight, banks in two dozen, seven, eight were simply not adequately capitalised.

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A simple leverage ratio defined as equity over assets fell throughout the 20th century and into the 21st century.

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And this meant that even as a small loss on banks, assets was enough to use up banks capital and render a firm insolvent.

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And this had been hidden to some extent by flatted ratios of capital or equity over so-called risk weighted assets.

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Minimum levels of such capital ratios had been in place since 1988 when the Basel committee implemented these minimum standards.

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But banks not only were these minimum standards low.

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Banks could also calculate their own risk weighted assets and end of pools sometime.

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And these fell through the 1990s, implying that actual capital ratios looked better than they actually were.

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For example, to give you an example. Mortgages tend to have very low risk weights because banks can use houses as collateral.

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However, mortgages were also at the heart of the U.S. subprime crisis in 2008.

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So they clearly are not risk free. And some economists had seen house price falls in the US coming,

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including actually economists at Lehman Brothers who I happened to work with a few years earlier.

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But no one had connected the dots to banks exposures. Another issue with these regulatory minimum requirements was that they were hot laws.

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So they didn't really give banks any buffer.

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This sort of breaching of these or getting close to these minimum requirements meant effectively that the banks were insolvent.

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And finally, that they didn't take into account systemic risk.

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So banks were very interconnected. But this was not taken into account in the calculation of the buffer.

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So regulators typically looked very much just at the individual bank.

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And that meant that particularly large firms had lower capital ratios than they should have really had.

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So, I mean, the banks turned out not to be solvent in the event of stress, but importantly, they also did not hold the liquidity to withstand stress.

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And back in 2008, there was no minimum liquidity requirements for banks to hold.

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And liquidity concerns easily turned into solvency concerns.

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So why did it matter that the banking system was on the brink of failing over a decade ago?

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So despite unprecedented government and central bank interventions,

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the cost of the global financial crisis on livelihoods were huge and banks were not only the cause of this.

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They also then amplified the shock by cutting back lending.

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And that's it. That was a classic aggregate demand externality.

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So cutting back on lending seems rational for each individual bank in terms of preserving that precious capital.

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But collectively, it gave rise to dividend devastating feedback loop with the real economy.

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So firms not being able to borrow it and to invest and potentially then driving

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them into insolvency and then raking up further credit losses for the banks.

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So what did we learn from this sorry episode?

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In the decade that followed the Basel Committee and the Financial Stability Board, jointly with its members,

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set out to reform the financial system and in particular banks so that in future banks

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would be resilient to stress and would not importantly require bailouts from governments.

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So for the first time, banks now face minimum liquidity and leverage requirements to address both liquidity and

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solvency concerns and capital requirements based on risk weighted assets have been increased.

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There are also two further innovations on capital ratios. First of all, the quantity of capital has been improved.

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So that's more careful thinking about risk weights.

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But it's also now possible to bail in proportion of banks debts in the event of stress.

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So to turn it into into capital.

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And the second innovation was to add buffers on top of minimum regulatory capital requirements to account for bank systemic risk.

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So each bank now holds a capital conservation buffer. If you one of the first line of defence and designated authority,

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typically central banks or regulatory authorities can also set a countercyclical capital buffer.

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So this can increase in times, in good times, and then be released in stress, giving banks back capital that they can use to increase lending.

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And moreover, systemically important things now have to build an additional buffer as well to

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account for their special role in the domestic and global financial system. And these buffers often call macro prudential capital buffers.

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And they, as I said, they take into account systemic risk. So look at the system as a whole rather than the individual bank.

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And. In many countries, authorities have also started stress testing banks.

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So looking at the stress events and whether their balance sheets are resilient to these events.

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And again, these these are really important because they help assess the resilience of banks,

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but also help to set appropriate capital buffers for banks.

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And in the bank in the U.K., the financial policy committee has been created within the Bank of England and it is tasked with

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setting the countercyclical capital buffer and does so by making reference to the stress tests.

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For example. So what does that have to do with the current shock?

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Maybe it's helpful to briefly look back at the episode in March when the global impact of Kofod on the global economy really became apparent.

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And what happened in financial markets? It wasn't all plain sailing.

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And asset prices face chop adjustments as the economic damage was becoming obvious and liquidity in some key markets,

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including in government bond markets, which tend to be the most liquid liquid dried up.

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Any vast amounts of central bank stimulus or intervention?

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Calm markets down. But what was remarkable about this episode was that the cool financial markets, namely the banks, held up.

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Of course, the crisis is far from over,

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but we can observe that banks were in position over the past months to be part of the solution rather than part of the problem.

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As Mark Canino, a former governor, put it, and this has helped to keep the economic damage really focus on the pandemic rather

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than in having these extra feedback loops from the financial system to the economy.

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One important feature here was that banks funding costs remain low throughout the stress episode.

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So markets have confidence that banks were in a position to withstand the stress.

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And that is sort of one piece of evidence where we think market banks really are in a better position now.

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And the other piece of evidence is not banks lend vast amounts in March as companies drew on their credit lines and they have continued to lend.

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OK, yes. With the support of government guarantee schemes.

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But basically, banks were not in a position to be used as intermediaries during a major, major economic stress.

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And I think just just also another word on stress tests.

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Just having run those over the last few years has again proved really helpful also to the Bank of England.

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We were now able to look at the kind of look at similar stress scenarios and understand the extent to which

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banks would be resilient to such a deep stress and compare the current situation to the stress test we have run.

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And and, ah, Deputy Governor John Cunliffe remarked earlier in the year that had a pandemic

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with a similar impact to what we expected the current one to half early on.

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Had that occurred in 2007, banks capital would have been wiped out.

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And indeed, as we saw it, it hasn't been wiped out. Maybe just one more thing on a central bank response.

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Our own liquidity facilities have also come into that.

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And banks came to the Bank of England to borrow it, indexed long term repo operation,

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but also with we also put in place other facilities where banks could come and get liquidity.

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And I think that banks have come is a really good sign.

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It's a sign of success. That was no stigma attached.

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And it's, again, helped to keep up liquidity in markets or what needs to replenish it when it when it was ended.

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Welcome. Well, it's always training all the secret,

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but another really important lifeline of the global economy was appliances at the Fed has swap lines with other central banks that made the

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major central banks where central banks like the bank thing and the ECB and others can give their reserve banks access to U.S. dollars.

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And again, in this crisis, U.S. dollars were in short supply and we saw banks going into these auctions and getting U.S. dollars.

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And that that was very helpful. And I've run these auctions myself.

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A couple of years ago, no banks ever turned up, but these facilities are meant to be a backstop.

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So, again, that they were used now was a good thing. So that that was really all I had to say on on the on on the crisis itself,

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that there may be just a few words on on the sort of lessons, very early lessons that we can draw.

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So one is, again, around stress tests and what we what we might learn from the current episode.

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We had not run a stress test based on a pandemic. So that is clearly something one could do that we should do.

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Natural disasters as well. We had one plan for climate change and that is still still in the pipeline.

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So clearly that those those would be would be good. The pandemic has also highlighted the growing importance of the digital world.

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So the thinking really hard about the opportunities, but also financial stability risks save from from fintech is on on the agenda.

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And then looking back at the March episode while banks held up.

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I think that the limelight has again been on the nonbanks.

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So financial institutions other than banks and their behaviour has.

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Has raised some questions. So hedge funds, investment funds, money market funds or a dash for cash?

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That's a good, catchy phrase. And sort of those questions around why why they did that.

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And as I said before, this was only really stopped when central banks intervened massively.

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And of course, that can create moral hazard going forward if investors expect to be bailed out by central banks.

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So should that be a quid pro quo in terms of thinking about potentially regulation?

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And the Financial Stability Board is starting to think about this?

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Yeah, that's maybe. Well. So for now, though, I think it's really interesting.

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And we've already got five questions lined up. So those of you listening, you can click on the forum to ask the question.

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You earlier mentioned some various stats, leverage ratios, et cetera.

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They are accessible in her paper. The link is at the central bottom of the screen and it's open access and free.

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So if you want to see the charts that are in there,

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I now to the even more fun bit of the queue and I think where we're at risk of going over time here.

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But I will, as ever, keep things on track. I'm sort of the first one for me.

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You've basically gone through a whole range of different shifts, interventions, policy, regulatory changes.

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Over the last 10 years, designed to make the system safer.

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And, you know, I guess you could say so far so good. We had a dash for cash.

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We had the kind of ram the system to keep it propped up.

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But even though you hadn't done a pandemic stress test, so far, we haven't had massive financial failure.

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But it's still potentially, you know, it's possibly not a V shaped recovery will come back onto that since early days.

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Do you think. You've done enough in the last decade.

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Is there more to be done? How kind of twitchy are we feeling in the Bank of England about.

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About the crisis? Is the fact that no banks have collapsed at this point?

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Is it proof that actually the system's robust and we're in good shape and we can rest easy?

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Or are you still a bit nervous?

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I mean, of course, there's there comes a point at which the any losses could exceed the capital that the banks currently hold.

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And as I said, a lot is dependent on how the pandemic pans out.

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But we have we have run.

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So we have both our central case focussed from our NPR Monetary Policy Report,

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and that goes into the future, not those three years out into the future.

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And we have looked at a sort of desk based stress test based on that, whether banks can withstand that scenario.

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And they can easily can. We are not concerned about that.

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Now, of course, that there are downside risks to this scenario.

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But we've also run so-called reverse stress tests of how bad would it have to get for banks to to start

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looking like they might be getting close to their to their capital levels where we might not being concerned.

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And and the macro scenarios look look vastly worse than what we are expecting in the central case.

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But I think also reasonably could expect in terms of tail risk.

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So never say never. But I think we are we are confident that the banks are in a very good place.

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I think what is important here is this aggregate demand externality.

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It is very important for banks to keep lending throughout this if they stop lending.

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I think we that could create further issues for the economy.

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And then again, further issues for the banks. So it is important for the banks to withstand this.

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And it is a message that the financial policy committee is really keen to to get out there.

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Yeah, I guess I guess it's your job to be ever vigilant and nervous and paranoid.

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So it's in some sense an unfair question. But just on that on that very last point.

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If banks were to stop lending, then we'd have a problem.

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As you said in your remarks, we say if you're in a recession and your things are not looking bright for the next year or two,

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maybe the vaccines don't work. We've seen a few cases of reinfection around the world.

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Banks might not want to keep lending and then they might become part of the problem, not part of the solution to turn Mark Carney's phrase around.

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How do you get them to lend when they don't want to? I mean, at the moment we've had these government guarantee schemes.

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What are what are the tools? What what what what are the weapons that you have to force banks to keep lending if they don't want to?

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So I think I think the government guarantee schemes, as you said, have have been very helpful in this regard.

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And then it's it's nudging nudging banks and trying to get them to understand this point.

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And they they have large capital buffers.

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It is really important that these are usable. They are seen as being usable.

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And and banks. Yeah. Don't worry about depleting them.

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Yeah. That that I think is is the key. OK.

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Now another consequence of these policies that you have in place to make sure that the

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system works is I guess it's a modern and souped up version of the Greenspan put.

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And actually, there's a question here from David Calver that's relevant to this idea.

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Are there actors that are still too big to fail where they know they're going to be bailed out so they can just continue on their merry way,

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doing many, many more risky activities? And if you've got these government guarantee schemes to banks, you might get them to lend.

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But how do you kind of walk that type of making sure they're not just lending Marylee to anybody who's going to lose,

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lose the money and put it into inefficient, unproductive uses? Yeah, two on the first.

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Are the others still banks out there that are too big to fail?

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I mean, we now have resolution regimes that and that is another innovation.

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I didn't quite mention that. But relative to the global financial crisis,

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we have these resolution regimes that aim to make it possible to resolve banks, including the largest banks.

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And there is evidence that the implicit subsidy that large banks in particular enjoyed so large banks enjoyed lower

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funding costs because of this implicit subsidy of being or the expectation of markets that they would be bailed out.

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That this implicit subsidy is is falling, has fallen since since the global financial crisis.

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That that's quite a nice Liberty Street economics from the New York Fed blog post on this, if anyone's interested.

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So that that is on on that.

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So I think yeah, I think I think that is evidence that we aren't starting to see results in terms of tackling that problem.

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And, um, in terms of the side, that is positive. Good to hear.

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I mean, in terms of other entities that are perhaps benefiting from central bank interventions that might,

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you know, might be regulated, according there's a question here from Pitt, Juncker saying,

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given that that effectively you're trying to save money market funds in March during the dash for cash,

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shouldn't capital ratios or other regulatory interventions be applied to those sorts of funds as well?

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Are they in the firing line? Well, I think I think that is certainly something that is being discussed, whether whether there has to be some.

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I mean, I I'm not sure I'd go as far as calling it regulation, but some answers sort of that if if there is an expectation for a central bank

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bailouts that some adjustments have to be made on on the other side as well.

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So the SBC has thought about especially investment funds before this.

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That's a sort of a mismatch between open with amended funds.

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Investors can get their money out immediately, but A, they are not invested in necessarily only liquid assets.

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So that sort of liquidity mismatch here. I'm thinking thinking about that further.

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So that there are there are ways to to think about it.

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It's not necessarily capital ratios or what applies to banks, but it's also important that a global solution is found on this, I think.

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And that's why it's right of the Financial Stability Board. This is stuff.

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Yeah, that makes sense. That's another good question.

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Come through from a member of our team on the perverse potential perverse impacts of some of these shifts post financial crises.

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The there's a report beyond banks, which is World Bank review of institutional investors from 2018 that suggested that some of these reforms,

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solvency, too, and the like, have actually impaired the ability or our collective ability to invest in infrastructure.

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Obviously, is a huge amount of low carbon infrastructure needed over the coming decade and encourage

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the kind of short termism and a greater unwillingness to take these long term,

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big, big sorts of risks that we know it needed. And do you think that's a problem?

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And if it is, what could be done about it? Yeah, it's it's not something I've personally thought about too much to be personal.

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To be perfectly honest. I mean, it's it's always a balancing act, right?

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Regulation is necessary for financial stability and for macro economic stability.

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But regulation will also have some side effects.

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Now, whether that particular one is is one I couldn't personally say.

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But clearly, if if it was, it's something we we should we should look at.

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Fair enough. Now, you mentioned that you're in the process of doing a kind of climate stress test.

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As we know, you haven't done a pandemic. One never saw the stress test.

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You could imagine the Bank of England and other banks doing weather about cyber or military or food security or whatever.

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I'm not asking you about that.

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But I mean, you clearly have a role in kind of thinking through these big non-financial scenarios because they have impacts on the financial system,

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which makes your job rob fun. But this is this is a build on retailers question.

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If you've got this role in thinking through these scenarios and thinking about resilience to too abrupt shocks,

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perhaps a little bit more about that, perhaps.

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Is this something you can say about promoting business continuity or even nation or national continuity in the event of something really,

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really bad going on? How far does the remit extend?

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I think I think that's the crux of race question, right?

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Yeah. I mean, on on on stress tests that it's kind of from normal McCray's stress tests.

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I think, as I said before, I think those are really important.

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And and just to understand what the what the risks that are out there and to make make sure the financial system is is stable.

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It is resilient to those.

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I think in that sense and maybe that speaks a little bit to the previous question, it's also important to extend this beyond banks.

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It's a tough system. Wide stress tests might include insurers and maybe investment funds as well.

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In terms of the operational side, I mean, we are.

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So for banks, we are looking at the operational side and making sure that they are resilient.

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I believe that we have looked at cyber stress tests and making sure that that banks are resilient to that,

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or at least that the weaknesses are known and unknown to banks.

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I think that is sort of the the nice thing about stress tests.

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It's not just helping the regulators. It's also helping the institutions understanding where the weaknesses are.

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So whether, you know, not sure what is meant by the national sort of contingency plan, but I think certainly for the institutions involved,

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we can we can make sure that they are resilient on lots of different different fronts.

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And that's sort of a question how far the Bank of England treatment extends here.

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Yeah, well, actually, that's the good one.

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Let me come on to that, because there is a question here about the extent of the remit of the Bank of England.

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Where are we? Let me just run this one. Well, this one from Hari Kamara here has said,

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given that you're now being increasingly expected to go well beyond just simply

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tweaking interest rates here and there and seeing what happens to inflation,

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is central banking just getting more and more challenging as time passes and as awful lot

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of complexity that a central bank has to be mindful of to keep the whole system running?

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How are you guys managing that in the bank? It's certainly true for the Bank of England relative to 10 years ago.

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Our agreement has expanded vastly. So we now have not just, as you said, not just monetary policy,

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but also the micro prudential supervision of banks and insurance has come back into the Bank of England when it was with the FSA before.

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So that's the vast expand. And then added to that is no systemic angle, sending the system as a whole, the financial system as a whole.

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So, yes, it has become very much more complex, but that's not the case for every single central bank on the planet to the Bank of England is relative.

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I mean, there are other central banks that have such a wide remit, but some central bank.

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Still very much the monetary policy focus with other regulators tasked with financial stability and prudential issues.

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I think the benefits of having it all under one roof is that one can really

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internalise externalities so they end and be able to look at these systemic risks,

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but then actually also have the power to do something about it with firms directly.

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But yes, it has become more complex.

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Yeah. And let me just continue along this angle a little bit about the about the remote shift.

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You're working, as I do, on environmental economics and environmental problems.

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I'm often often encounter environmentalists who'd like to see a much, much more active intervention.

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Central bank. You know, green QE picking off particular directional sectors and saying, well, look,

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we won't have a financial system if the whole of human civilisation is under water or Freidel bushfires,

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etc. So it is within the central bank's remit to be thinking about the directionality of the economy.

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Now, a standard response that is. Well, hold on a moment. It's the Treasury's job to do that.

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All the finance ministries is the central bank is an independent authority.

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The Treasury is elected. If you don't like what they're doing, go and vote out the current party and deal with that in a Democratic fashion.

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So this is kind of tricky because clearly the central bank does have you know,

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it does have now a mandate to think about climate in a way that it didn't a decade ago,

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because it's relevant to these core issues of financial stability and macro prudential regulation.

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But should we be going further? And if so, how much?

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I gather I think it's possibly the Hungarian Central Bank who who is adjusting their their policy instruments to favour green lending.

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Could you ever see that happening more widely around the world?

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Yes. Very, very interesting. So so the various angles here.

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Right. As you said, I think the one key way where we can influence this debate is by making sure that the financial system is.

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Cognisant of the risks and addresses them and through that can also make sure that businesses and businesses they invest in,

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the financial investors, invest in change, change their behaviour.

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So I think that is a key, direct way where we can influence incentives of the private off of the private side of the economy,

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which ultimately is much more powerful than anything I think we can do.

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But you mentioned green me. I mean, that the issues that the NPC has, typically all the power from QE is to do it at scale.

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And that scale means that we have typically bought government bonds and gilts and we have we have bought some corporate bonds.

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But the universe out there is not huge in terms of sterling corporate bonds.

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So while one can talk about kind of greening that portfolio and I believe that

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the bank has said that we would start talking to the Treasury about this,

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that could be a possibility. But as I said, it's a relatively in relative terms smallish portfolio.

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But ultimately, it is for the Treasury to give the MPAC such agreement.

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Our agreement is for the economy as a whole.

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We do not look at kind of to favour individual firms that we would have to do anything of

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jointly with with the government or take our cues from that in terms of recent changes.

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Yeah, I know that in the sense that's the answer. I expect the best kind of counter to the position.

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I think that you've just put forward that I can that I've come across at least is that QE one way or another isn't neutral.

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You know, you can you can trace the effects that certain cars, certain people, certain you may not intend on, intended to be biased.

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But the consequences of just buying up lots of government bonds do have a

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differential impact on savers versus those in debt or investors or et cetera,

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et cetera. So you're given these distributional consequences.

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Shouldn't you be more cognisant of them? I guess that's the strongest critic.

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But I'm taking you some way away from our current discussions, so feel free to say no.

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Thank you. Cameron. I, I, I you have to be sort of distributional consequences more generally.

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I would. Would you ever be thinking about how the either distribution costs?

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I mean, the conversation we had last week about the distributional impact of COGAT on on on women.

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Yeah. Is that something that's simply not in the central bank's mandate?

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Yeah, it's a Treasury issue. It's an elected Democratic issue.

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Or is it something that you at least perhaps could keep an eye on whether whether it's the green agenda, women or whatever, any of these agendas?

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How much do you think about them? I think we are we are clearly aware of them and.

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But it's not really. Again, I don't think it's for the Bank of England an unelected technocrats, to really do anything.

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The distributional side. But I haven't.

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I mean, having said that, I don't. I'm not actually, you know what what our job is to make sure that the economy functions.

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And that say that we we make sure that recessions aren't as deep as they'd otherwise we would be by loosening monetary policy.

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And through that, create opportunities for for everyone.

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Any and our research does suggest that had it not been for QE following the global financial crises, unemployment would have been much higher.

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So I think it's false to say QE just benefits the rich because it increases asset prices.

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No, it it helps everyone in the economy. And and there is research out that that shows that it helps both young households

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through income channels and older households through wealth channels.

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Interesting. But I'm sure that's a point which met many of those who critique QE haven't taken on board.

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So thank you for that. Let me take us back a little bit more closer to the current question at hand and the pandemic.

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And there's a question here. Upvoted by David Vines, who who you may recognise that name.

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Why have loans to firms in the current crisis not been made income contingent with repayment due only if the firm survives.

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I guess there's a question about how you would get repayment if the firm didn't survive anyway.

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But that is the question for you.

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What do you think about this broader question about encouraging, I guess, more sophisticated and contingent lending practises?

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Well, I think it is an important thing in the middle of the crisis induced by the Bykov.

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So we're talking in March, April,

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May was to get schemes off the ground quickly and to get money and lending out that out to the businesses that needed it quickly.

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And any if you try to design clever schemes that that tried to be, you know,

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have specific incentives attached to them, that will inevitably take longer.

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So I think I think that was again, that was sort of speed was of the essence.

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And I think your point is an important one. How would you how you would you then get the money back anyway?

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So I think the point was to get the money to as many firms as needed it,

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and hence also the government guarantees on on these schemes that mean that banks didn't have to go through lengthy credit cheques, for example.

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And, you know, the government is expecting to lose money on these on these things.

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Now, there's a question directly related to this, just a new one from Isha on the issue of where some of these tail risks really lie.

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At the end of the day, I mean, in a sense,

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a lot of the regulatory changes in the last 10 years has been to push the resilience onto the private sector,

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whether it's the financial system or banks or lesser known banking institutions.

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And to say, look, you guys have got to get better at your buffers. You've got to be ready for these sorts of events.

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It's your job to withstand these shocks. I guess an alternative position which is not pushing, but she's kind of asking here,

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couldn't you say, well, guys, just go about your business in a really efficient way?

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Not a resilient way. Yeah. And you can be fragile.

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You can be robust as you like, because the government is going to sort these tail risks out when they arise.

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So I've just put two extreme positions. I mean, I guess in a sense, the question really is how much of this risk sharing,

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where do you draw the line on the risk sharing for these sorts of tail risks?

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And we've moved it since the financial crisis towards it being shared with the private sector.

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And your answer previously is that's fair because they were giving a kind of positive externality from the Greenspan of an equivalent.

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But could you say that actually the private sector is not well-placed to either anticipate or

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manage these risks so the needle could swing back and government should just bear more of it?

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Yeah. Very, very interesting question. I mean, I think we've seen after the global financial crisis.

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That there was a lot of public backlash about against banks being bailed out by government, taxpayer money being used to do that.

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So, you know, I mean, this is certainly very much my personal view.

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But you can then spin that further into what? What that's done to our political systems.

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So I think I think that that would potentially be quite dangerous just in terms of the perception of seeing governments continuously.

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A bailout. I think that's what you then would have to do if you don't want to create this

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dhimmitude of banks failing to lend to the real economy and making things less.

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Right. Yeah. That's fair enough. Now, I wonder if I want to go a little bit more broad for a moment here.

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So it seems to me that the practise of macro and the practise of central banking

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has changed rather considerably in the last decade since the financial crisis.

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I mean, you yourself have just outlined quite a large number of new things that you're now doing that you weren't doing before.

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When we had the financial crisis. The other editors of the Oxford Review of Economic Policy.

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And I got together, led by David Vines, whose question you just answered and asked ourselves the question,

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well, where is the new theory going on here? Because when we had the last Great Depression, you know, new swathes of valuable economic theory emerged.

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Many of the Keynesian ideas that we have in place today emerged then.

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And David Vines, until his editing has edited. And we'll be publishing a new issue on macro economic theory.

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So you'll have just given that you're the kind of the bleeding edge of the cutting edge of it.

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Do you think that the practise is kind of outpacing the theory?

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Are you going back to academic papers and so on to work out what you should do here or you guys just having to think,

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look at the data and make up policy as you go, seemingly doing a very good job so far.

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But, you know, how is this kind of balance between theory and practise postcrisis playing out?

392
00:45:18,870 --> 00:45:28,410
Yeah, very, very interesting question. I mean, I think we have seen quite a few.

393
00:45:28,410 --> 00:45:35,700
Well, advances in the academic literature since the global financial crisis.

394
00:45:35,700 --> 00:45:40,620
I'm not sure, as you say, I'm not sure it's taking us into a completely new direction.

395
00:45:40,620 --> 00:45:45,990
So I think a lot has been sort of refining approaches that were used before,

396
00:45:45,990 --> 00:45:50,400
for example, with these two models, you know, putting financial frictions in.

397
00:45:50,400 --> 00:45:54,920
So your bottom line, what DSG is to some of our listeners.

398
00:45:54,920 --> 00:45:59,190
Yeah. A macro workforce models if you want.

399
00:45:59,190 --> 00:46:04,080
I'm dynamic stochastic models, which are big,

400
00:46:04,080 --> 00:46:15,030
big models that try to capture my a behaviour of agents in the economy through through various relations.

401
00:46:15,030 --> 00:46:24,060
But I think that the key to how they how these models tend to do it is to assuming that agents are rational.

402
00:46:24,060 --> 00:46:29,430
So they they each agent behaves the same way in a rational way.

403
00:46:29,430 --> 00:46:37,950
And I think that is something the crisis, the global financial crisis has really called into question.

404
00:46:37,950 --> 00:46:41,550
And there have been approaches with heterogeneous agent models.

405
00:46:41,550 --> 00:46:51,700
I think over the past decade or so, the last few years, which which are showing a new direction.

406
00:46:51,700 --> 00:46:57,970
So I think that that's an interesting area to watch. I think in terms of our work.

407
00:46:57,970 --> 00:47:05,310
Yeah. I mean, it's very data driven. We really very much look look at the data, what what that tells us.

408
00:47:05,310 --> 00:47:10,800
And in that respect, econometric advances are really helpful.

409
00:47:10,800 --> 00:47:16,320
But again, often what we use is not necessarily sort of the latest cutting edge,

410
00:47:16,320 --> 00:47:23,190
but it's it's vector auto regressive models where we where we just look at a time series of

411
00:47:23,190 --> 00:47:30,540
data and the relations between between the data points and the different different variables.

412
00:47:30,540 --> 00:47:35,170
So I think I think it's really interesting.

413
00:47:35,170 --> 00:47:44,850
I mean, we have as I said, I think that the key innovation in financial regulation over the last decade has been this macro prudential approach.

414
00:47:44,850 --> 00:47:47,490
This is looking at the system as a whole.

415
00:47:47,490 --> 00:47:56,670
And and there is literature now kind of looking at the interaction of different policies, monetary policy, macro prudential policies and so on.

416
00:47:56,670 --> 00:48:06,990
But there is a there is a long way to go and really understanding how the different parts of the economy work work together.

417
00:48:06,990 --> 00:48:13,800
So certainly would be I would be interested to see more on that from the academic side.

418
00:48:13,800 --> 00:48:19,320
Well, you wrote in the new issue on macro, we'll be out in a matter of a month or two.

419
00:48:19,320 --> 00:48:23,760
So look out for that. And those at the bank and those listening.

420
00:48:23,760 --> 00:48:32,880
And if you are sitting there thinking, I've still got no idea what dynamic stochastic general equilibrium model is or a vector auto regressive model,

421
00:48:32,880 --> 00:48:40,740
then have a look at the Oxford Review's previous special issue on macro that David finds edited.

422
00:48:40,740 --> 00:48:45,030
That will take you through some of those questions. Now we're fast running out of time.

423
00:48:45,030 --> 00:48:49,320
We've had a very large number of questions. We've still got a large number of questions open.

424
00:48:49,320 --> 00:48:53,040
So you're there. You're really triggering huge amounts of interest here.

425
00:48:53,040 --> 00:49:00,840
Just before diving back in and covering the remaining questions, probably superficially or not at all.

426
00:49:00,840 --> 00:49:04,830
I just wanted to get your sense on the future economic outlook.

427
00:49:04,830 --> 00:49:14,190
So we've had big reports in the press of the chief economist and a co-author say it's going to be a V shaped recovery, as I understand it.

428
00:49:14,190 --> 00:49:20,300
The press has also noted that Andrew Bartlett, the governor of the bank, doesn't think it's going to be reshaped, obviously.

429
00:49:20,300 --> 00:49:25,470
And he didn't say it would be. He said it could be. In a sense, he's completely correct at the time.

430
00:49:25,470 --> 00:49:29,100
Could it be? But do you have a personal view?

431
00:49:29,100 --> 00:49:35,040
Let me put it that way, about how long how bad is this going to be?

432
00:49:35,040 --> 00:49:42,180
How many millions of unemployed people we have? And when we all go back to life, as usual, if ever.

433
00:49:42,180 --> 00:49:53,090
What are your thoughts? Well, of course, as I said at the start, it really depends on what happens with the with the pandemic.

434
00:49:53,090 --> 00:49:57,710
I think I think my best guess for now is, you know.

435
00:49:57,710 --> 00:50:03,230
Yes. We've seen the start of a V recovery. But I think we're also seeing that tail off.

436
00:50:03,230 --> 00:50:11,380
So it's not a symmetric V. If you want just to add to the terminology here.

437
00:50:11,380 --> 00:50:18,950
It's a we are still clearly on a path to recovery.

438
00:50:18,950 --> 00:50:29,120
But when we will get back to the level of GDP of output that we have seen because of it, I think it is unclear.

439
00:50:29,120 --> 00:50:41,600
And I think that the longer we are seeing waves and more rising again, numbers of cases rising, then dropping off again, then rising again.

440
00:50:41,600 --> 00:50:47,330
The more if that happens, the more drawn out this recovery will be.

441
00:50:47,330 --> 00:50:54,290
And I think that it is likely that we will see some scarring in the economy.

442
00:50:54,290 --> 00:51:06,140
So by that, I mean that we won't get back to the path of GDP that we had predicted before the crisis hit because, you know,

443
00:51:06,140 --> 00:51:15,980
because of unemployment firms being lost to the economy, some workers not finding it easy to find new jobs, not that sort of thing.

444
00:51:15,980 --> 00:51:26,990
And the extent to which I think is really uncertain. So we we have not not we don't have a good handle yet on how much of this scarring to expect.

445
00:51:26,990 --> 00:51:34,920
But again, I think the longer this masks, the larger the scarring is likely to be.

446
00:51:34,920 --> 00:51:40,490
But, yeah. So I think for now, recovery is happening.

447
00:51:40,490 --> 00:51:47,410
But of course, a rising number of cases is likely to do that again.

448
00:51:47,410 --> 00:51:56,330
I think we are seeing that it's not just restrictions that mean economic activity is could tilt.

449
00:51:56,330 --> 00:52:03,380
It is also people's behaviour, as is the case numbers rise even even with no further restrictions.

450
00:52:03,380 --> 00:52:13,490
You see you see we look at some foster indicators like mobility across across countries, and you do see that taking off again.

451
00:52:13,490 --> 00:52:19,790
There are differences across countries. But the pattern this is pretty.

452
00:52:19,790 --> 00:52:23,120
Well, these things are always expressed in letters, aren't they?

453
00:52:23,120 --> 00:52:26,300
So whether it's an L shape recovery or U.

454
00:52:26,300 --> 00:52:34,400
Shape recovery or a V shaped recovery or a W shaped recovery, maybe the second wave gif puts us back down into the trough again.

455
00:52:34,400 --> 00:52:42,410
And we're into a W I have new on the other is something called a K shaped recovery, which which is when you recover.

456
00:52:42,410 --> 00:52:45,180
But some people do very well and some people do very badly.

457
00:52:45,180 --> 00:52:53,330
And actually, given that we know the scarring of those just entering the workforce, know the young seems to be particularly bad.

458
00:52:53,330 --> 00:53:00,110
You could argue that maybe we're facing something like a W a blended with a K shaped recovery.

459
00:53:00,110 --> 00:53:04,550
But anyway, it was probably enough or not, unless you really want to come back home.

460
00:53:04,550 --> 00:53:10,060
Letters and recoveries. I'll take that as a note.

461
00:53:10,060 --> 00:53:16,640
The last one of mine I'm sorry, I'm abusing my chest position here, especially given time running out.

462
00:53:16,640 --> 00:53:25,820
I just wanted to ask you a question about inflation, because it is is it what what the bank does think about.

463
00:53:25,820 --> 00:53:38,000
Obviously, one of the things and we're having big, big government spending, big deficits and big borrowing.

464
00:53:38,000 --> 00:53:43,790
What do you think the risks are that after all of this stimulus into the economy,

465
00:53:43,790 --> 00:53:54,090
that once we pull out of the W or the K or the whatever it's going to be, we have an inflation problem to manage.

466
00:53:54,090 --> 00:54:02,370
I mean, what I would say is that inflation across the world or these across advanced economies has been very low for a long time.

467
00:54:02,370 --> 00:54:10,110
In fact, since at least the global financial crisis and we we saw, of course, after the global financial crisis, a lot of government spending as well.

468
00:54:10,110 --> 00:54:16,260
And similar arguments were advanced then. And this didn't lead to an increase in inflation.

469
00:54:16,260 --> 00:54:24,210
In fact, that was the opposite. And the other thing I'd say is if you did see inflation creeping up,

470
00:54:24,210 --> 00:54:28,560
that's why you've got the Bank of England and other central banks to keep that in cheque.

471
00:54:28,560 --> 00:54:32,400
So obviously, it is something that the FEC is looking at.

472
00:54:32,400 --> 00:54:40,410
And should the need arise. I mean, it would it if it's induced by government spending.

473
00:54:40,410 --> 00:54:47,370
It should also then be related to activity picking up.

474
00:54:47,370 --> 00:54:53,730
So it's pretty clear cut what the what the MPAC would do in such a situation.

475
00:54:53,730 --> 00:54:58,080
OK, well, let let me give you a kind of smorgasbord of the remaining questions,

476
00:54:58,080 --> 00:55:01,450
given the very good a few minutes you can pick which one you might want to answer.

477
00:55:01,450 --> 00:55:09,350
So there was one about planning for a stress test when the volcanic eruptions that wipe out summer some.

478
00:55:09,350 --> 00:55:14,070
It's one about the role of the bank in a world that is post growth.

479
00:55:14,070 --> 00:55:19,590
You know, if we if we hit limits. I mean, I have very strong views about this.

480
00:55:19,590 --> 00:55:29,690
But, you know, would your role be different? There's a question about non-financial sorry, nonbank financial institutions.

481
00:55:29,690 --> 00:55:34,830
You know, they're always there lurking in the background, possibly causing trouble at some point.

482
00:55:34,830 --> 00:55:44,280
How do we get these guys under control? It's my paraphrasing of Roger Berts question one about sustainable investing uncovered in the green recovery.

483
00:55:44,280 --> 00:55:52,710
And as you know, we've done some work on this. It's in this issue that you're in on the Oxford Review of Economic Policy.

484
00:55:52,710 --> 00:55:58,350
Bunch of questions about distribution effects and greenwashing, which in a sense we've already touched upon.

485
00:55:58,350 --> 00:56:01,750
One about Brexit. And how do we think about Brexit?

486
00:56:01,750 --> 00:56:11,220
And the pandemic is a Jew shocks. And the last comment is, what does an asterisk shaped recovery look like?

487
00:56:11,220 --> 00:56:15,550
Tyler, you've completely got me there. I've got no idea. I doubt usually it does either.

488
00:56:15,550 --> 00:56:25,700
So all of that sort of questions, would you like to pick up any of those or just make some concluding remarks?

489
00:56:25,700 --> 00:56:30,000
I mean, maybe maybe the sort of.

490
00:56:30,000 --> 00:56:37,140
What was the phrase garishness? No, that's not quite right. New growth or post growth where pace growth.

491
00:56:37,140 --> 00:56:41,820
I mean, I think we will always be in a world of economic fluctuations.

492
00:56:41,820 --> 00:56:55,260
So I think that there will always there will be there will always be a role for cyclical policies, be that fiscal or monetary policies.

493
00:56:55,260 --> 00:57:00,450
That's that's my view on that one. And then on on the nonbank one.

494
00:57:00,450 --> 00:57:04,410
I mean, I think I think we've we've covered that to some extent as well.

495
00:57:04,410 --> 00:57:10,920
I think yeah, they are they are in the background sometimes in the foreground as in March.

496
00:57:10,920 --> 00:57:21,790
And clearly it's something to think about there. I think maybe on the on Brexit, I think we'll we'll have to see you see it.

497
00:57:21,790 --> 00:57:25,410
The negotiations are still ongoing.

498
00:57:25,410 --> 00:57:36,570
It is interesting to think about what effect Brexit will have on the economy and how it's related to to the Kovik crisis.

499
00:57:36,570 --> 00:57:41,640
And you can think about, you know, which sectors would be hit by either shock.

500
00:57:41,640 --> 00:57:46,860
And that tells you whether it's editable or not. That's sort of an interesting way to think about it.

501
00:57:46,860 --> 00:57:54,180
I think maybe it will end on that one that's been been really interesting.

502
00:57:54,180 --> 00:58:02,700
Very thought provoking. Lots of good questions. Well, we can rely on Oxford Martin school audience to hit you with good questions.

503
00:58:02,700 --> 00:58:06,840
I know. And he has always appreciated coming up for lectures.

504
00:58:06,840 --> 00:58:12,600
I'm not sure he's always been delighted by all of the questions that he's been hit by when he comes here.

505
00:58:12,600 --> 00:58:18,600
And I daresay that you weren't delighted by all of them today, but you did a admirably diplomatic job of answering them.

506
00:58:18,600 --> 00:58:23,730
Well done. Thank you for your time. And thank you, everyone, for tuning in again and for listening.

507
00:58:23,730 --> 00:58:29,190
As I said, this is the penultimate TalkTalk number seven in the series eight.

508
00:58:29,190 --> 00:58:37,470
We are working on the eight toolkits with Mariana Motsyk Carto, who again has a paper in this issue of the Oxford Review of Economic Policy.

509
00:58:37,470 --> 00:58:46,260
As you know, she's been doing very interesting work on the entrepreneurial state and thinking about the role of government across many areas,

510
00:58:46,260 --> 00:58:49,830
not just innovation, but also in times of stress like this.

511
00:58:49,830 --> 00:58:56,260
So when we have a date for her to. Charles Godfrey, the director of the Office About School.

512
00:58:56,260 --> 00:59:00,420
We will let you know who got on the website right Rines for me to thank you.

513
00:59:00,420 --> 00:59:06,070
You really are very insightful. I enjoyed the conversation. And keep up the good work,

514
00:59:06,070 --> 00:59:13,480
because we need you to be spotting those disasters ahead of time and making sure the financial system is ready to cope with them.

515
00:59:13,480 --> 00:59:16,075
Thanks, everyone. Thank you.