A remarkable conference by Bank of England’s Adam Posen.
Quotation: “We need a financial system that is subject to sufficient competitive pressure such that it provides enough traditional lending to nonfinancial business, rather than one beset by too big to fail institutions that engage in relatively unproductive speculative behavior. And we need this structural change in the United Kingdom in order to generate sustainable growth in the coming years, not just to diminish systemic risk, though either alone would be reason enough. The UK public debate should not limit itself to regulatory fixes changing incentives for the current banking institutions, however constructive those regulatory reforms may be. Given the extent of public guarantees, bailouts, and even ownership for the UK banking system at present, we can choose to come out of this crisis with a better financial infrastructure than that with which the economy entered this crisis. The point of a financial system, and of quantitative easing when that system breaks down, is to keep credit flowing.”
Adam S. Posen, Member, Monetary Policy Committee, Bank of England; Senior Fellow, Peterson Institute for International Economics
Speech presented the Dean’s Lecture Series, Cass Business School, London
October 26, 2009
Highlights from the Conference
“I am concerned that the UK financial system as currently structured, as well as damaged by the crisis, may not be ready to support the coming handover of recovery to private-sector impetus from public-sector stimulus. That would not put us back into a downwards spiral, but it would mean that any recovery could be shorter, weaker, and more erratic than it otherwise should be.
(…)
The limitations of the UK financial markets for financing of domestic nonfinancial corporations, however, have been brought into sharp relief by QE’s practical constraints in that regard. This is
one area where there is an uncomfortable parallel with Japan’s situation in the 1990s: The relative limits in the UK on the availability of nonbank financing for smaller companies may
constrain the emergence of a sustainable private-sector-led recovery. Such structural problems due to the underdevelopment of the UK domestic credit market is another reason that the
excessive concentration and other structural deficiencies of the UK financial system should be addressed directly—that is independently of and in addition to the compelling arguments for so
doing to promote financial stability.
(…)
Aggressive macroeconomic stimulus from fiscal and monetary policy was the right response to the panic and subsequent recession, but there are limits to how far and how long public policy
stimulus can substitute for private sector sources of demand and growth.11 Even if macroeconomic policy stimulus has not reached its limit, it would be preferable for many
reasons, not least of all sustainability, for private demand to be the driver of growth after the worst of a recession is over. That is also the natural response of a market economy, absent major
policy mistakes and financial disruptions.
(…)
That is why in testimony before the UK Treasury Select Committee (2009c) as well as before the US Congress Joint Economic Committee (2009a), I have argued that that the banking system
must be largely fixed before macroeconomic stimulus needs to be withdrawn. The alternative is likely to result in a stillborn recovery, a double-dip (though less severe) recession, and/or
persistently slow growth.
(…)
Students of British economic history know that the perceived failures of the City to provide sufficient capital to British business in favor of catering to growth and export of financial services themselves is a long-standing theme, leading to the Macmillan Commission of 1931 and the Wilson Commission of 1980, along with many political and academic diatribes since the 1870s. While I am not in a position to evaluate those historical contentions for exaggeration and bias, the divergence between the structure of the British financial system today and the present and coming financing needs of British business is to me apparent and troubling.
(…)
In the coming years for the United Kingdom, it will be the ability of the financial system to support private capital formation and investment in innovative activities that matters
for national economic performance, not the growth of financial sector employment or financial innovation that does not yield benefits to nonfinancial institutions and households.”
