Good afternoon and welcome to the seventh and penultimate session from the Oxford Martin School joint
with the Oxford Review of Economic Policy and the Smith School on the economics of the KOVA 19 pandemic.
We had a fascinating discussion last week about the impacts of the pandemic on GENDA with Professor Sarah Smith and Almudena Syria.
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.
Now, this is an economic and a financial crisis, and we had one of those just over 10 years ago.
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.
She's written a paper you can see there at the bottom of your screen.
You can click to go onto it joint with and it them who is the chief economist of the Bank of England.
Julia is very well credentialed here. She's had a stint at Lehman Brothers before the crisis.
I should say the Financial Times has had now 12 years almost.
I think the Bank of England looking at these sorts of issues as the head of international surveillance.
So she's basically responsible for having identified anything that might go wrong in the global economy.
And if she didn't see it well and we all go down, it's her fault.
So she's beautifully positioned. Yeah. She has a doctorate in economics from Nuffield at Oxford.
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,
I guess, of the central banking and the financial system this time compared with the last crisis.
And then I'm very much looking forward to getting into the nitty gritty conversation with you live.
The floor is yours. Thank you very much, Kam, and it's a pleasure to be here.
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.
And as Ken said, I will start with a few remarks based on my paper with any holding that looks set to
the to crisis to the global financial crisis and the current Kofod induced crisis.
Now, of course, the current crisis is very much ongoing and the future outlook will very much
depend on how the pandemic pans out and indeed what healthcare can do about that.
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
from the previous crises and what what we have not seen and current crises relative to the 2008 crisis.
So while over 19 has caused a global collapse in activities and that too many job
losses we have not seen is the financial system or at least banks collapsing.
Indeed, they have supported the really and the real economy, as I will argue.
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.
You will recall that Lehman Brothers in 2008, a U.S. investment bank collapsed.
But earlier rumblings were also visible in the UK with queues forming outside Northern Rock with people worried about getting their money back.
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.
And banks in many countries, including in the UK, had to be bailed out with taxpayers money.
And I just started work at the Bank of England in 2008.
Analysing past banking crises was all the rage, as I can tell you.
But let me start by looking at what went wrong.
Then before we discussed some reforms and then come back to the current shock, the shock and some early lessons from that.
So with hindsight, banks in two dozen, seven, eight were simply not adequately capitalised.
A simple leverage ratio defined as equity over assets fell throughout the 20th century and into the 21st century.
And this meant that even as a small loss on banks, assets was enough to use up banks capital and render a firm insolvent.
And this had been hidden to some extent by flatted ratios of capital or equity over so-called risk weighted assets.
Minimum levels of such capital ratios had been in place since 1988 when the Basel committee implemented these minimum standards.
But banks not only were these minimum standards low.
Banks could also calculate their own risk weighted assets and end of pools sometime.
And these fell through the 1990s, implying that actual capital ratios looked better than they actually were.
For example, to give you an example. Mortgages tend to have very low risk weights because banks can use houses as collateral.
However, mortgages were also at the heart of the U.S. subprime crisis in 2008.
So they clearly are not risk free. And some economists had seen house price falls in the US coming,
including actually economists at Lehman Brothers who I happened to work with a few years earlier.
But no one had connected the dots to banks exposures. Another issue with these regulatory minimum requirements was that they were hot laws.
So they didn't really give banks any buffer.
This sort of breaching of these or getting close to these minimum requirements meant effectively that the banks were insolvent.
And finally, that they didn't take into account systemic risk.
So banks were very interconnected. But this was not taken into account in the calculation of the buffer.
So regulators typically looked very much just at the individual bank.
And that meant that particularly large firms had lower capital ratios than they should have really had.
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.
And back in 2008, there was no minimum liquidity requirements for banks to hold.
And liquidity concerns easily turned into solvency concerns.
So why did it matter that the banking system was on the brink of failing over a decade ago?
So despite unprecedented government and central bank interventions,
the cost of the global financial crisis on livelihoods were huge and banks were not only the cause of this.
They also then amplified the shock by cutting back lending.
And that's it. That was a classic aggregate demand externality.
So cutting back on lending seems rational for each individual bank in terms of preserving that precious capital.
But collectively, it gave rise to dividend devastating feedback loop with the real economy.
So firms not being able to borrow it and to invest and potentially then driving
them into insolvency and then raking up further credit losses for the banks.
So what did we learn from this sorry episode?
In the decade that followed the Basel Committee and the Financial Stability Board, jointly with its members,
set out to reform the financial system and in particular banks so that in future banks
would be resilient to stress and would not importantly require bailouts from governments.
So for the first time, banks now face minimum liquidity and leverage requirements to address both liquidity and
solvency concerns and capital requirements based on risk weighted assets have been increased.
There are also two further innovations on capital ratios. First of all, the quantity of capital has been improved.
So that's more careful thinking about risk weights.
But it's also now possible to bail in proportion of banks debts in the event of stress.
So to turn it into into capital.
And the second innovation was to add buffers on top of minimum regulatory capital requirements to account for bank systemic risk.
So each bank now holds a capital conservation buffer. If you one of the first line of defence and designated authority,
typically central banks or regulatory authorities can also set a countercyclical capital buffer.
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.
And moreover, systemically important things now have to build an additional buffer as well to
account for their special role in the domestic and global financial system. And these buffers often call macro prudential capital buffers.
And they, as I said, they take into account systemic risk. So look at the system as a whole rather than the individual bank.
And. In many countries, authorities have also started stress testing banks.
So looking at the stress events and whether their balance sheets are resilient to these events.
And again, these these are really important because they help assess the resilience of banks,
but also help to set appropriate capital buffers for banks.
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
setting the countercyclical capital buffer and does so by making reference to the stress tests.
For example. So what does that have to do with the current shock?
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.
And what happened in financial markets? It wasn't all plain sailing.
And asset prices face chop adjustments as the economic damage was becoming obvious and liquidity in some key markets,
including in government bond markets, which tend to be the most liquid liquid dried up.
Any vast amounts of central bank stimulus or intervention?
Calm markets down. But what was remarkable about this episode was that the cool financial markets, namely the banks, held up.
Of course, the crisis is far from over,
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.
As Mark Canino, a former governor, put it, and this has helped to keep the economic damage really focus on the pandemic rather
than in having these extra feedback loops from the financial system to the economy.
One important feature here was that banks funding costs remain low throughout the stress episode.
So markets have confidence that banks were in a position to withstand the stress.
And that is sort of one piece of evidence where we think market banks really are in a better position now.
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.
OK, yes. With the support of government guarantee schemes.
But basically, banks were not in a position to be used as intermediaries during a major, major economic stress.
And I think just just also another word on stress tests.
Just having run those over the last few years has again proved really helpful also to the Bank of England.
We were now able to look at the kind of look at similar stress scenarios and understand the extent to which
banks would be resilient to such a deep stress and compare the current situation to the stress test we have run.
And and, ah, Deputy Governor John Cunliffe remarked earlier in the year that had a pandemic
with a similar impact to what we expected the current one to half early on.
Had that occurred in 2007, banks capital would have been wiped out.
And indeed, as we saw it, it hasn't been wiped out. Maybe just one more thing on a central bank response.
Our own liquidity facilities have also come into that.
And banks came to the Bank of England to borrow it, indexed long term repo operation,
but also with we also put in place other facilities where banks could come and get liquidity.
And I think that banks have come is a really good sign.
It's a sign of success. That was no stigma attached.
And it's, again, helped to keep up liquidity in markets or what needs to replenish it when it when it was ended.
Welcome. Well, it's always training all the secret,
but another really important lifeline of the global economy was appliances at the Fed has swap lines with other central banks that made the
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.
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.
And that that was very helpful. And I've run these auctions myself.
A couple of years ago, no banks ever turned up, but these facilities are meant to be a backstop.
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,
that there may be just a few words on on the sort of lessons, very early lessons that we can draw.
So one is, again, around stress tests and what we what we might learn from the current episode.
We had not run a stress test based on a pandemic. So that is clearly something one could do that we should do.
Natural disasters as well. We had one plan for climate change and that is still still in the pipeline.
So clearly that those those would be would be good. The pandemic has also highlighted the growing importance of the digital world.
So the thinking really hard about the opportunities, but also financial stability risks save from from fintech is on on the agenda.
And then looking back at the March episode while banks held up.
I think that the limelight has again been on the nonbanks.
So financial institutions other than banks and their behaviour has.
Has raised some questions. So hedge funds, investment funds, money market funds or a dash for cash?
That's a good, catchy phrase. And sort of those questions around why why they did that.
And as I said before, this was only really stopped when central banks intervened massively.
And of course, that can create moral hazard going forward if investors expect to be bailed out by central banks.
So should that be a quid pro quo in terms of thinking about potentially regulation?
And the Financial Stability Board is starting to think about this?
Yeah, that's maybe. Well. So for now, though, I think it's really interesting.
And we've already got five questions lined up. So those of you listening, you can click on the forum to ask the question.
You earlier mentioned some various stats, leverage ratios, et cetera.
They are accessible in her paper. The link is at the central bottom of the screen and it's open access and free.
So if you want to see the charts that are in there,
I now to the even more fun bit of the queue and I think where we're at risk of going over time here.
But I will, as ever, keep things on track. I'm sort of the first one for me.
You've basically gone through a whole range of different shifts, interventions, policy, regulatory changes.
Over the last 10 years, designed to make the system safer.
And, you know, I guess you could say so far so good. We had a dash for cash.
We had the kind of ram the system to keep it propped up.
But even though you hadn't done a pandemic stress test, so far, we haven't had massive financial failure.
But it's still potentially, you know, it's possibly not a V shaped recovery will come back onto that since early days.
Do you think. You've done enough in the last decade.
Is there more to be done? How kind of twitchy are we feeling in the Bank of England about.
About the crisis? Is the fact that no banks have collapsed at this point?
Is it proof that actually the system's robust and we're in good shape and we can rest easy?
Or are you still a bit nervous?
I mean, of course, there's there comes a point at which the any losses could exceed the capital that the banks currently hold.
And as I said, a lot is dependent on how the pandemic pans out.
But we have we have run.
So we have both our central case focussed from our NPR Monetary Policy Report,
and that goes into the future, not those three years out into the future.
And we have looked at a sort of desk based stress test based on that, whether banks can withstand that scenario.
And they can easily can. We are not concerned about that.
Now, of course, that there are downside risks to this scenario.
But we've also run so-called reverse stress tests of how bad would it have to get for banks to to start
looking like they might be getting close to their to their capital levels where we might not being concerned.
And and the macro scenarios look look vastly worse than what we are expecting in the central case.
But I think also reasonably could expect in terms of tail risk.
So never say never. But I think we are we are confident that the banks are in a very good place.
I think what is important here is this aggregate demand externality.
It is very important for banks to keep lending throughout this if they stop lending.
I think we that could create further issues for the economy.
And then again, further issues for the banks. So it is important for the banks to withstand this.
And it is a message that the financial policy committee is really keen to to get out there.
Yeah, I guess I guess it's your job to be ever vigilant and nervous and paranoid.
So it's in some sense an unfair question. But just on that on that very last point.
If banks were to stop lending, then we'd have a problem.
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,
maybe the vaccines don't work. We've seen a few cases of reinfection around the world.
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.
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.
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?
So I think I think the government guarantee schemes, as you said, have have been very helpful in this regard.
And then it's it's nudging nudging banks and trying to get them to understand this point.
And they they have large capital buffers.
It is really important that these are usable. They are seen as being usable.
And and banks. Yeah. Don't worry about depleting them.
Yeah. That that I think is is the key. OK.
Now another consequence of these policies that you have in place to make sure that the
system works is I guess it's a modern and souped up version of the Greenspan put.
And actually, there's a question here from David Calver that's relevant to this idea.
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,
doing many, many more risky activities? And if you've got these government guarantee schemes to banks, you might get them to lend.
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,
lose the money and put it into inefficient, unproductive uses? Yeah, two on the first.
Are the others still banks out there that are too big to fail?
I mean, we now have resolution regimes that and that is another innovation.
I didn't quite mention that. But relative to the global financial crisis,
we have these resolution regimes that aim to make it possible to resolve banks, including the largest banks.
And there is evidence that the implicit subsidy that large banks in particular enjoyed so large banks enjoyed lower
funding costs because of this implicit subsidy of being or the expectation of markets that they would be bailed out.
That this implicit subsidy is is falling, has fallen since since the global financial crisis.
That that's quite a nice Liberty Street economics from the New York Fed blog post on this, if anyone's interested.
So that that is on on that.
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.
And, um, in terms of the side, that is positive. Good to hear.
I mean, in terms of other entities that are perhaps benefiting from central bank interventions that might,
you know, might be regulated, according there's a question here from Pitt, Juncker saying,
given that that effectively you're trying to save money market funds in March during the dash for cash,
shouldn't capital ratios or other regulatory interventions be applied to those sorts of funds as well?
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.
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
bailouts that some adjustments have to be made on on the other side as well.
So the SBC has thought about especially investment funds before this.
That's a sort of a mismatch between open with amended funds.
Investors can get their money out immediately, but A, they are not invested in necessarily only liquid assets.
So that sort of liquidity mismatch here. I'm thinking thinking about that further.
So that there are there are ways to to think about it.
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.
And that's why it's right of the Financial Stability Board. This is stuff.
Yeah, that makes sense. That's another good question.
Come through from a member of our team on the perverse potential perverse impacts of some of these shifts post financial crises.
The there's a report beyond banks, which is World Bank review of institutional investors from 2018 that suggested that some of these reforms,
solvency, too, and the like, have actually impaired the ability or our collective ability to invest in infrastructure.
Obviously, is a huge amount of low carbon infrastructure needed over the coming decade and encourage
the kind of short termism and a greater unwillingness to take these long term,
big, big sorts of risks that we know it needed. And do you think that's a problem?
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.
To be perfectly honest. I mean, it's it's always a balancing act, right?
Regulation is necessary for financial stability and for macro economic stability.
But regulation will also have some side effects.
Now, whether that particular one is is one I couldn't personally say.
But clearly, if if it was, it's something we we should we should look at.
Fair enough. Now, you mentioned that you're in the process of doing a kind of climate stress test.
As we know, you haven't done a pandemic. One never saw the stress test.
You could imagine the Bank of England and other banks doing weather about cyber or military or food security or whatever.
I'm not asking you about that.
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,
which makes your job rob fun. But this is this is a build on retailers question.
If you've got this role in thinking through these scenarios and thinking about resilience to too abrupt shocks,
perhaps a little bit more about that, perhaps.
Is this something you can say about promoting business continuity or even nation or national continuity in the event of something really,
really bad going on? How far does the remit extend?
I think I think that's the crux of race question, right?
Yeah. I mean, on on on stress tests that it's kind of from normal McCray's stress tests.
I think, as I said before, I think those are really important.
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.
It is resilient to those.
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.
It's a tough system. Wide stress tests might include insurers and maybe investment funds as well.
In terms of the operational side, I mean, we are.
So for banks, we are looking at the operational side and making sure that they are resilient.
I believe that we have looked at cyber stress tests and making sure that that banks are resilient to that,
or at least that the weaknesses are known and unknown to banks.
I think that is sort of the the nice thing about stress tests.
It's not just helping the regulators. It's also helping the institutions understanding where the weaknesses are.
So whether, you know, not sure what is meant by the national sort of contingency plan, but I think certainly for the institutions involved,
we can we can make sure that they are resilient on lots of different different fronts.
And that's sort of a question how far the Bank of England treatment extends here.
Yeah, well, actually, that's the good one.
Let me come on to that, because there is a question here about the extent of the remit of the Bank of England.
Where are we? Let me just run this one. Well, this one from Hari Kamara here has said,
given that you're now being increasingly expected to go well beyond just simply
tweaking interest rates here and there and seeing what happens to inflation,
is central banking just getting more and more challenging as time passes and as awful lot
of complexity that a central bank has to be mindful of to keep the whole system running?
How are you guys managing that in the bank? It's certainly true for the Bank of England relative to 10 years ago.
Our agreement has expanded vastly. So we now have not just, as you said, not just monetary policy,
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.
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.
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.
I mean, there are other central banks that have such a wide remit, but some central bank.
Still very much the monetary policy focus with other regulators tasked with financial stability and prudential issues.
I think the benefits of having it all under one roof is that one can really
internalise externalities so they end and be able to look at these systemic risks,
but then actually also have the power to do something about it with firms directly.
But yes, it has become more complex.
Yeah. And let me just continue along this angle a little bit about the about the remote shift.
You're working, as I do, on environmental economics and environmental problems.
I'm often often encounter environmentalists who'd like to see a much, much more active intervention.
Central bank. You know, green QE picking off particular directional sectors and saying, well, look,
we won't have a financial system if the whole of human civilisation is under water or Freidel bushfires,
etc. So it is within the central bank's remit to be thinking about the directionality of the economy.
Now, a standard response that is. Well, hold on a moment. It's the Treasury's job to do that.
All the finance ministries is the central bank is an independent authority.
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.
So this is kind of tricky because clearly the central bank does have you know,
it does have now a mandate to think about climate in a way that it didn't a decade ago,
because it's relevant to these core issues of financial stability and macro prudential regulation.
But should we be going further? And if so, how much?
I gather I think it's possibly the Hungarian Central Bank who who is adjusting their their policy instruments to favour green lending.
Could you ever see that happening more widely around the world?
Yes. Very, very interesting. So so the various angles here.
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.
Cognisant of the risks and addresses them and through that can also make sure that businesses and businesses they invest in,
the financial investors, invest in change, change their behaviour.
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,
which ultimately is much more powerful than anything I think we can do.
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.
And that scale means that we have typically bought government bonds and gilts and we have we have bought some corporate bonds.
But the universe out there is not huge in terms of sterling corporate bonds.
So while one can talk about kind of greening that portfolio and I believe that
the bank has said that we would start talking to the Treasury about this,
that could be a possibility. But as I said, it's a relatively in relative terms smallish portfolio.
But ultimately, it is for the Treasury to give the MPAC such agreement.
Our agreement is for the economy as a whole.
We do not look at kind of to favour individual firms that we would have to do anything of
jointly with with the government or take our cues from that in terms of recent changes.
Yeah, I know that in the sense that's the answer. I expect the best kind of counter to the position.
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.
You know, you can you can trace the effects that certain cars, certain people, certain you may not intend on, intended to be biased.
But the consequences of just buying up lots of government bonds do have a
differential impact on savers versus those in debt or investors or et cetera,
et cetera. So you're given these distributional consequences.
Shouldn't you be more cognisant of them? I guess that's the strongest critic.
But I'm taking you some way away from our current discussions, so feel free to say no.
Thank you. Cameron. I, I, I you have to be sort of distributional consequences more generally.
I would. Would you ever be thinking about how the either distribution costs?
I mean, the conversation we had last week about the distributional impact of COGAT on on on women.
Yeah. Is that something that's simply not in the central bank's mandate?
Yeah, it's a Treasury issue. It's an elected Democratic issue.
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?
How much do you think about them? I think we are we are clearly aware of them and.
But it's not really. Again, I don't think it's for the Bank of England an unelected technocrats, to really do anything.
The distributional side. But I haven't.
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.
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.
And through that, create opportunities for for everyone.
Any and our research does suggest that had it not been for QE following the global financial crises, unemployment would have been much higher.
So I think it's false to say QE just benefits the rich because it increases asset prices.
No, it it helps everyone in the economy. And and there is research out that that shows that it helps both young households
through income channels and older households through wealth channels.
Interesting. But I'm sure that's a point which met many of those who critique QE haven't taken on board.
So thank you for that. Let me take us back a little bit more closer to the current question at hand and the pandemic.
And there's a question here. Upvoted by David Vines, who who you may recognise that name.
Why have loans to firms in the current crisis not been made income contingent with repayment due only if the firm survives.
I guess there's a question about how you would get repayment if the firm didn't survive anyway.
But that is the question for you.
What do you think about this broader question about encouraging, I guess, more sophisticated and contingent lending practises?
Well, I think it is an important thing in the middle of the crisis induced by the Bykov.
So we're talking in March, April,
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.
And any if you try to design clever schemes that that tried to be, you know,
have specific incentives attached to them, that will inevitably take longer.
So I think I think that was again, that was sort of speed was of the essence.
And I think your point is an important one. How would you how you would you then get the money back anyway?
So I think the point was to get the money to as many firms as needed it,
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.
And, you know, the government is expecting to lose money on these on these things.
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.
At the end of the day, I mean, in a sense,
a lot of the regulatory changes in the last 10 years has been to push the resilience onto the private sector,
whether it's the financial system or banks or lesser known banking institutions.
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.
It's your job to withstand these shocks. I guess an alternative position which is not pushing, but she's kind of asking here,
couldn't you say, well, guys, just go about your business in a really efficient way?
Not a resilient way. Yeah. And you can be fragile.
You can be robust as you like, because the government is going to sort these tail risks out when they arise.
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,
where do you draw the line on the risk sharing for these sorts of tail risks?
And we've moved it since the financial crisis towards it being shared with the private sector.
And your answer previously is that's fair because they were giving a kind of positive externality from the Greenspan of an equivalent.
But could you say that actually the private sector is not well-placed to either anticipate or
manage these risks so the needle could swing back and government should just bear more of it?
Yeah. Very, very interesting question. I mean, I think we've seen after the global financial crisis.
That there was a lot of public backlash about against banks being bailed out by government, taxpayer money being used to do that.
So, you know, I mean, this is certainly very much my personal view.
But you can then spin that further into what? What that's done to our political systems.
So I think I think that that would potentially be quite dangerous just in terms of the perception of seeing governments continuously.
A bailout. I think that's what you then would have to do if you don't want to create this
dhimmitude of banks failing to lend to the real economy and making things less.
Right. Yeah. That's fair enough. Now, I wonder if I want to go a little bit more broad for a moment here.
So it seems to me that the practise of macro and the practise of central banking
has changed rather considerably in the last decade since the financial crisis.
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.
When we had the financial crisis. The other editors of the Oxford Review of Economic Policy.
And I got together, led by David Vines, whose question you just answered and asked ourselves the question,
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.
Many of the Keynesian ideas that we have in place today emerged then.
And David Vines, until his editing has edited. And we'll be publishing a new issue on macro economic theory.
So you'll have just given that you're the kind of the bleeding edge of the cutting edge of it.
Do you think that the practise is kind of outpacing the theory?
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,
look at the data and make up policy as you go, seemingly doing a very good job so far.
But, you know, how is this kind of balance between theory and practise postcrisis playing out?
Yeah, very, very interesting question. I mean, I think we have seen quite a few.
Well, advances in the academic literature since the global financial crisis.
I'm not sure, as you say, I'm not sure it's taking us into a completely new direction.
So I think a lot has been sort of refining approaches that were used before,
for example, with these two models, you know, putting financial frictions in.
So your bottom line, what DSG is to some of our listeners.
Yeah. A macro workforce models if you want.
I'm dynamic stochastic models, which are big,
big models that try to capture my a behaviour of agents in the economy through through various relations.
But I think that the key to how they how these models tend to do it is to assuming that agents are rational.
So they they each agent behaves the same way in a rational way.
And I think that is something the crisis, the global financial crisis has really called into question.
And there have been approaches with heterogeneous agent models.
I think over the past decade or so, the last few years, which which are showing a new direction.
So I think that that's an interesting area to watch. I think in terms of our work.
Yeah. I mean, it's very data driven. We really very much look look at the data, what what that tells us.
And in that respect, econometric advances are really helpful.
But again, often what we use is not necessarily sort of the latest cutting edge,
but it's it's vector auto regressive models where we where we just look at a time series of
data and the relations between between the data points and the different different variables.
So I think I think it's really interesting.
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.
This is looking at the system as a whole.
And and there is literature now kind of looking at the interaction of different policies, monetary policy, macro prudential policies and so on.
But there is a there is a long way to go and really understanding how the different parts of the economy work work together.
So certainly would be I would be interested to see more on that from the academic side.
Well, you wrote in the new issue on macro, we'll be out in a matter of a month or two.
So look out for that. And those at the bank and those listening.
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,
then have a look at the Oxford Review's previous special issue on macro that David finds edited.
That will take you through some of those questions. Now we're fast running out of time.
We've had a very large number of questions. We've still got a large number of questions open.
So you're there. You're really triggering huge amounts of interest here.
Just before diving back in and covering the remaining questions, probably superficially or not at all.
I just wanted to get your sense on the future economic outlook.
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.
The press has also noted that Andrew Bartlett, the governor of the bank, doesn't think it's going to be reshaped, obviously.
And he didn't say it would be. He said it could be. In a sense, he's completely correct at the time.
Could it be? But do you have a personal view?
Let me put it that way, about how long how bad is this going to be?
How many millions of unemployed people we have? And when we all go back to life, as usual, if ever.
What are your thoughts? Well, of course, as I said at the start, it really depends on what happens with the with the pandemic.
I think I think my best guess for now is, you know.
Yes. We've seen the start of a V recovery. But I think we're also seeing that tail off.
So it's not a symmetric V. If you want just to add to the terminology here.
It's a we are still clearly on a path to recovery.
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.
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.
The more if that happens, the more drawn out this recovery will be.
And I think that it is likely that we will see some scarring in the economy.
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,
because of unemployment firms being lost to the economy, some workers not finding it easy to find new jobs, not that sort of thing.
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.
But again, I think the longer this masks, the larger the scarring is likely to be.
But, yeah. So I think for now, recovery is happening.
But of course, a rising number of cases is likely to do that again.
I think we are seeing that it's not just restrictions that mean economic activity is could tilt.
It is also people's behaviour, as is the case numbers rise even even with no further restrictions.
You see you see we look at some foster indicators like mobility across across countries, and you do see that taking off again.
There are differences across countries. But the pattern this is pretty.
Well, these things are always expressed in letters, aren't they?
So whether it's an L shape recovery or U.
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.
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.
But some people do very well and some people do very badly.
And actually, given that we know the scarring of those just entering the workforce, know the young seems to be particularly bad.
You could argue that maybe we're facing something like a W a blended with a K shaped recovery.
But anyway, it was probably enough or not, unless you really want to come back home.
Letters and recoveries. I'll take that as a note.
The last one of mine I'm sorry, I'm abusing my chest position here, especially given time running out.
I just wanted to ask you a question about inflation, because it is is it what what the bank does think about.
Obviously, one of the things and we're having big, big government spending, big deficits and big borrowing.
What do you think the risks are that after all of this stimulus into the economy,
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.
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.
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.
And similar arguments were advanced then. And this didn't lead to an increase in inflation.
In fact, that was the opposite. And the other thing I'd say is if you did see inflation creeping up,
that's why you've got the Bank of England and other central banks to keep that in cheque.
So obviously, it is something that the FEC is looking at.
And should the need arise. I mean, it would it if it's induced by government spending.
It should also then be related to activity picking up.
So it's pretty clear cut what the what the MPAC would do in such a situation.
OK, well, let let me give you a kind of smorgasbord of the remaining questions,
given the very good a few minutes you can pick which one you might want to answer.
So there was one about planning for a stress test when the volcanic eruptions that wipe out summer some.
It's one about the role of the bank in a world that is post growth.
You know, if we if we hit limits. I mean, I have very strong views about this.
But, you know, would your role be different? There's a question about non-financial sorry, nonbank financial institutions.
You know, they're always there lurking in the background, possibly causing trouble at some point.
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.
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.
Bunch of questions about distribution effects and greenwashing, which in a sense we've already touched upon.
One about Brexit. And how do we think about Brexit?
And the pandemic is a Jew shocks. And the last comment is, what does an asterisk shaped recovery look like?
Tyler, you've completely got me there. I've got no idea. I doubt usually it does either.
So all of that sort of questions, would you like to pick up any of those or just make some concluding remarks?
I mean, maybe maybe the sort of.
What was the phrase garishness? No, that's not quite right. New growth or post growth where pace growth.
I mean, I think we will always be in a world of economic fluctuations.
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.
That's that's my view on that one. And then on on the nonbank one.
I mean, I think I think we've we've covered that to some extent as well.
I think yeah, they are they are in the background sometimes in the foreground as in March.
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.
The negotiations are still ongoing.
It is interesting to think about what effect Brexit will have on the economy and how it's related to to the Kovik crisis.
And you can think about, you know, which sectors would be hit by either shock.
And that tells you whether it's editable or not. That's sort of an interesting way to think about it.
I think maybe it will end on that one that's been been really interesting.
Very thought provoking. Lots of good questions. Well, we can rely on Oxford Martin school audience to hit you with good questions.
I know. And he has always appreciated coming up for lectures.
I'm not sure he's always been delighted by all of the questions that he's been hit by when he comes here.
And I daresay that you weren't delighted by all of them today, but you did a admirably diplomatic job of answering them.
Well done. Thank you for your time. And thank you, everyone, for tuning in again and for listening.
As I said, this is the penultimate TalkTalk number seven in the series eight.
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.
As you know, she's been doing very interesting work on the entrepreneurial state and thinking about the role of government across many areas,
not just innovation, but also in times of stress like this.
So when we have a date for her to. Charles Godfrey, the director of the Office About School.
We will let you know who got on the website right Rines for me to thank you.
You really are very insightful. I enjoyed the conversation. And keep up the good work,
because we need you to be spotting those disasters ahead of time and making sure the financial system is ready to cope with them.
Thanks, everyone. Thank you.