7/25/2019 Prepare for the Next Recession

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Prepare For The Next Recession

By Martin Wolf

What might central banks do if the next recession hit while interest rates were still far below

pre-2008 levels? As a paper from the London-based Resoltion !ondation arges" this is

highl# likel#$ %entral banks need to be prepared for this eventalit#$ &he most important partof sch preparation is to convince the pblic that the# know what to do$

Today, eight-and-a-half years after the first signs of the financial crisis, the highest short-term

intervention rate applied by the Federal Reserve, the European Central Ban, the Ban of !apan

or the Ban of England is the latter"s half a per cent, #hich has been in effect since March $%%&and #ith no rise in sight' The ECB and the Bo! are even using negative rates, the latter after

more than $% years of short-term rates of %'( per cent, or less' The plight of the )* might not be

that dire' +evertheless, the latest maret epectations imply a base rate of roughly '. per cent in$%$ and around $'( per cent in $%$( - less than half as high as in $%%/'

What are the chances of a significant recession in the )* before $%$(0 1ery high indeed' Thesame surely applies to the )2, euro3one and !apan' 4ndeed, the imbalances #ithin the Chinese

economy, plus difficulties in many emerging economies, mae this a ris no#' The high-incomeeconomies are liely to hit a recession #ith much less room for conventional monetary loosening

than before previous recessions'

What #ould then be the options0

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5ne #ould be to do nothing' Many #ould call for the cleansing depression they believe the

#orld needs' 6ersonally, 4 find this idea cra3y, given the damage it #ould do to the social fabric'

7 second possibility #ould be to change targets, possibly to ones for gro#th or level of nominalgross domestic product or to a higher inflation rate' 4t #ould probably have been #ise to have

had a higher inflation target' But changing it #hen central bans are unable to deliver today"slo#er target might destabilise epectations #ithout improving outcomes' Moreover, #ithout

effective instruments a more ambitious target might 8ust seem empty bombast' 2o the thirdpossibility is either to change instruments or to use the eisting ones more po#erfully'

5ne instrument, not much discussed, #ould be to organise the deleveraging of economies' This

might need forced conversion of debt into e9uity' But, #hile desirable in etreme circumstances,this #ould be practically difficult'

7nother #ould be a still bigger scale of 9uantitative easing' 7t the end of the third 9uarter of last

year, the Bo!"s balance sheet #as /% per cent of :;6, against less than