As BIS chief economist he prepared with his team a significant group of reports for the central bankers general meetings. Early in the “bubble” decade those reports alerted about the risks of the “procyclicality” of the mainstream doctrine of the central bankers, a doctrine particularly inspired in the ideas and moves of the ‘Maestro’, Alan Greenspan, the Chairman of the Federal Reserve from 1987 until 2006. Nobody from the central bankers’ club listen to them. The reports warned of the coming crisis.

William White, 66, a Canadian from Ontario, leaves in Switzerland, but he travels the world conferencing about the flaws of the present monetary policy and the need for a new macrofinancial stability framework that resists procyclicality (‘in a market friendly way’, he would add). He does consulting with several entities, including governments, and works for the OECD in Paris. His retirement in a chalet in the Swiss highlands is far from quiet.

Some of his economic papers can be checked here (excluding the 2nd to 4th references in the list that refers to a different W. White).

Interview by Jorge Nascimento Rodrigues

Q: The present financial crisis – that the majority of analysts do not expected at all two and half years ago– is the biggest failure of the world’s central bankers since the founding of the BIS in May 1930?

A: This is clearly the most severe economic downturn since the 1930′s and central bankers bear some of the blame for sure. However, virtually every other layer of “governance” of the financial and economic system also failed. This includes all the internal governance of financial institutions, as well as regulators. There is plenty of blame to go around.

Q: From the annual reports your team presented at the BIS meetings the central bankers knew what’s going on and did nothing to stop Chairman Greenspan dynamics. Why? All these talented and powerful people thought they were gods in earth with the power to “discipline” the business cycles and the long economic waves? Or the ‘Maestro’ was a heavy political power from the solely superpower?

A: Why was our BIS work (and warnings) not acted upon? I put it down to personalities, paradigms and profits. The personality of Greenspan, who had different beliefs, was important. However, more important was the nature of the beliefs – the paradigm. The one period Keynesian model has no room for the buildup of imbalances over time, of the sort that we were warning about, and therefore the paradigm said all was well as long as inflation was under control- which it was. Finally, profits. Whenever things seem to be going well and everyone is making lots of money, there is very little appetite to question why. In my view that is why all the layers of “governance” failed. This goes back to a failing of human nature referred to in the Bible. Remember the story of Pharaohs’ dream; the seven fat cows and the seven thin cows. Same problem.

Q: You say: “The one period Keynesian model has no room for the buildup of imbalances over time”, but the fault was not from the monetarist paradigm?

A: The monetarist model is essentially the one period Keynesian model, but with “money” being used as an indicator for prospective inflationary pressures. The multiperiod model I refer too would rather see money and credit growth as potentially indicating deflation as the boom turns into bust.

Q: The so-called BRICs, also members of the BIS, have not said a word, or they were also an interested part of the “twenty glorious years of credit bubbles”?

A: Emergent economies (EMEs) were certainly part of it. With inflation low (the China factor) in the industrial countries (ICs), the ICs could keep interest rates very low- above all earlier this decade. This should have led to a depreciation of their currencies against those of the emerging market economies. However, for various reasons, the EMEs chose to resist the appreciation of their currencies by exchange rate intervention and easy monetary policies as well. The end result was a global bubble of excess liquidity.

«We may have even greater problems looking ahead.»

Q: Do you think the deregulation and the decompartmentalisation of the financial system in the Reagan and Clinton Administrations has “responsibility” in the crisis outcome?

A: I think the answer is yes. Deregulation (especially getting rid of the Glass-Steagal Act in the US) allowed many risky investment banking practices to become much more wide spread than they would otherwise have become. Moreover, the implication has been that to save the commercial banks, tightly linked with investment banks via shared use of markets, the safety net has had to be extended much more widely. It is also now a fact that virtually all big US banks are now universal banks (even Goldman Sachs has turned itself into a bank holding company) implying that we may have even greater problems looking ahead.

Q: Particularly in 2005 the BIS Committee on the Global Financial System (CGFS) sounded the alarm about the innovative financial products and the systemic risk associated. In December 2006, BIS reported that a loss of confidence began to take shape in that new financial continent. The central bankers were deaf and blinded?

A: The CGFS produced at least two solid pieces of work on this which received wide attention at the time. However, with only “assertions” that we might be on a bad path, there was no adequate follow up by anyone. This included the CGFS whose resources were very limited.

«Someone must be given a mandate to identify and act upon systemic risks.»

Q: Stephen Roach, Morgan Stanley Asia Chairman, just commented recently: “I would argue that it is more important to take a careful look at the central banking function, itself — namely, considering the possibility of making explicit changes to policy mandates that would force central banks to make systemic risk control an integral part of their mission”. Do you think this systemic risk control is similar to your proposal of a permanent survey of the major imbalances and stresses affecting the financial and economic sectors of the global economy?

A: I agree with virtually all of what Steve has to say, and have done so for many years. I think someone must be given a mandate to identify and act upon systemic risks. Exactly who should be given it is another story. In spite of the central banks having generally missed the buildup to this crisis, they are much better placed by way of training and macroeconomic orientation to do this than anyone else I can think of.

Q: Roach also refers to a new upgrade role of BIS: “empowering the Bank for International Settlements (BIS) with the authority of the global systemic risk regulator. Central banks need to be put on formal notice that the days of bubble-prone monetary policy are over.” Do you think your former organization must have a new role, in these times when other international bodies like IMF are also called to have a new role?

A: If the IMF and the Financial Stability Board already have been given this responsibility, they should get on with it. The BIS would of course help, through its committees and (separately) staff in any way possible. If the allocation of responsibility at the national level is already contentious, at the level of the international community it is almost impossible. This is because sovereignty (and power) essentially resides at the national level, and multinational bodies will always be constrained by this reality.

Q: Can you explain your proposal for a “lean” preemptive strategy against credit bubbles in the future, developing a culture of resistance to procyclicality?

A: The current crisis has created almost a consensus (see the Turner report, the de Larosière report, etc.) that procyclicality needs to be resisted. However, most of the proposals focus on using regulatory means, essentially in a ruled based way (like Spanish dynamic provisioning or capital requirements that rise with the cycle) to lean against the wind of the cycle. I think this is good, but we need to talk as well about the role of monetary policy. Central banks seem uncomfortable with raising this issue, because it invites the question of the role of central banks in contributing to the current crisis.

«It took almost twenty years to get into this mess, and we will not get out of it overnight.»

Q: Do you think the ongoing crisis is near the end? Or we are assisting a Great Depression in front of our eyes that has yet to fully run its course?

A: It took almost twenty years to get into this mess, and we will not get out of it over night. Both the household and financial sector need to deleverage in many big countries. This will take time. Moreover, many countries have inappropriate production structures looking forward. The export development strategy is now obsolete. This implies that countries with big trade surpluses must produce more non-tradeables, while debtor countries must produce more tradeables. In addition, the car, banking, housing, retail, transportation and tourist sectors all have a need to slim down. And, as a relevant aside, the fishing industry is on the verge of collapse as well. Again, finding new jobs for everyone will not be the work of an afternoon.

Q: You mentioned a Two Peaks model, with a Central Bank and separate regulators. Some analysts propose to “fusion” the two roles in the Central Bank, empowering even more this institution. Others suggest empower more the regulators and have a kind of political control over the Central Bank and its chairman. What do you think would be wise?

A: I think central banks should have responsibility for systemic issues and macroprudential regulation. Personally, to avoid too much centralization of power, I would give microregulation and market behavior to a separate regulatory body. However, it would have to be crystal clear that, when it was time for decisions to help safeguard systemic stability, the central bank was calling the shots and would have the power to make decisions.

(c) Jorge Nascimento Rodrigues, 2009