There is a danger that central bankers including Jean-Claude Trichet of the European Central Bank and Ben Bernanke of the Federal Reserve will hold interest rates too low and for too long — just as their predecessors did after the terror attacks on the United States in September 2001.
Speaking at the launch events of Qfinance in Doha on Wednesday 29 Seotember, Rajat Kumar Gupta, senior partner emeritus at management consultants McKinsey & Co, warned that keeping money cheap too long could compound the crisis by giving rise to inflationary pressures and the blowing up of new asset price bubbles.
(Note: if you’re interested in how to spot bubbles before they burst, read “Only white swans on the road to revulsion” a Qfinance Viewpoint by James Montier of Société Générale.
Gupta, who was addressing the FT Rethinking the Future of Finance conference in the Qatari capital, said a further risk is that governments will withdraw their stimulus packages too soon and choke the economic recovery.
The European Central Bank governing council member Vitor Constancio warned on 29 September that the premature withdrawal of stimulus packages could stifle economic growth. Speaking at a gathering of central bankers in Lisbon, Portugal, Constancio said: “There is major uncertainty about global recovery’s magnitude and sustainability. Possible premature withdrawal of budget stimulus poses risks.”
From their pre-crash recklessness and cavalier lending, Gupta said the world’s banks have swung too far in the other direction, shifting towards excessive caution. He warned that the banks’ new-found tight-fistedness could lead to a Japan-style “lost decade” of economic stagnation.
Gupta said he believes that today’s biggest near-term business and commercial opportunities are going to lie in developing nations including those in the Gulf region. He said that the emerging economies, especially India, have much to be proud of in terms of the effectiveness of their regulators and their central banks.
Gupta said one of the critical problems facing the global economy, which may give rise to future bubbles, is the continuing imbalance between the US and China. He said that annual consumer spending in the US is $11 trillion, but in China it is only $1 trillion.
Speaking at the same event, Gerald Corrigan, managing director of Goldman Sachs, said one of the legacies of the crisis is that risk monitoring and risk management will improve. “They are both improving and they will improve even further.
“One of the big pluses of this crisis is that no-one is arguing with the proposition that we need higher capital adequacy ratios. I believe many of these sorts of changes can be [accepted] without the need for heavy-handed regulation.”
Max Taylor, chairman of Mitsui-Sumitomo Insurance London Companies told the conference: “There is some cause for optimism but there remains much to do.” Gupta warned that the politicians at the recent G20 summit in Pittsburgh may have been presumptuous in their confidence that recovery is happening.
“We are very much in uncertain times,” said Gupta who has been with McKinsey since 1973 and was its worldwide managing director from 1994 to 2003. He added that “uncertainty” is something businesses will have to contend with for some time to come.
This blog was written for Qfinance on 1 October 2009. Written by Ian Fraser as part of the “live blogging” of the Qfinance launch events at the Ritz-Carlton Doha.
Qfinance – The Ultimate Resource, a comprehensive website and reference work on finance and the future of finance published by Bloomsbury Publishing and the Qatar Financial Center Authority, was launched in Doha on 29 September 2009.