Skip to main content
Op-Ed

VIDEO: To avoid market freeze, central banks have to act

CNBC

More disruptions in financial and other markets unless central banks take necessary actions to ensure markets do not freeze

Watch the full interview on CNBC here

What is your own assessment of how this core problem of slow growth can be resolved because you can inject liquidity how much ever you want but at some point in time you have to address the real problem at hand. What do you think a market or a country like China should do at this point? 

What do you do to prevent the potential meltdown, the risks of another recessionary shock that can emanate from shock of the markets? We saw that happen in 2008, and there are some concerns that are legitimate concerns, that a similar process is starting this time. Last time around it was in the US and Europe, this time it’s in Asia and China, but both the US and China and twin poles, two pillars, if you will, of global growth, and so the shock in any one of them is going to have the kind of repercussions that we have seen. The immediate question is about liquidity, about insuring that markets don’t freeze. I think the lesson we learned from 2008 was don’t let markets freeze under any circumstances which means the central banks have to be watching out for signs of liquidity threat both in domestic market and from a dollar or a foreign exchange viewpoint. I think that lesson has been well learned. I think we’re seeing banks quite sensitive to this potential threat and are reacting. The messaging from the central banks also, both China and our own, is be prepared to do anything in terms of intervention to stabilise to reduce volatility and so on.

I think the longer term issue is more complicated. A lot of the growth that we saw after the crisis including in our own economy was the result of this extremely powerful fiscal response – lots of money being spent, in China it was the huge infrastructure binge – and that is coming back to haunt these economies. So the growth momentum that we saw post the crisis I think lulled people into a false sense of complacency and right now the growth drivers are starting to flag. It’s difficult to address that because there isn’t much fiscal space. You can’t just do the same thing again. I think comes back then to the much longer term drivers of innovation and creativity and all the good things we like to talk about, but don’t give us immediate solutions. I think basically the world has to be prepared for a period of somewhat slower growth. Let’s not benchmark ourselves with the early 2000s when global growth was booming – 4.3, 4.5% for the world as a whole. It’s settling into a less attractive but possibly a more sustainable growth projectory. And we need to have both China and the US if not booming, then at least stable.

Fortunately the US is showing signs of stabilisation, which will be helped by lower energy prices. As you can see, most people are now postponing their forecast of a US monetary policy action. That suggests that inflation expectations are very very muted now.

What China is going to have to do is to get.. depreciation the will help but they should also make sure that they’re not doing things that destabilise the rest of the world, that threaten the stability of other markets. It means rediscovering their competitiveness, how they’re going to do that. There are transitions at work.. very complicated.. very long and complicated adjustments. My basic concern is that this is not the end of the story. Their market recovery today is not going to signal the end of the turbulence. They should be prepared for potential disruptions both in financial markets and in products markets for some time to come.

Are you getting a sense that the global economy, especially the two big ones, are slower than what markets are prepared for and therefore we are going to see more such jitters in the market in the days to come? Would it come to the level of currency wars, to grab whatever little growth that’s available?
I think that’s a very real threat. I do hope that China is recognising its global status now as the world’s second-largest economy and desist from open overt mercantilism in terms of depreciation. They have to exercise control. We’ve seen a little bit of restraint now. We’ve seen the currency depreciate by 3% and then stabilise, but when you have this kind of capital outflow, the pressure on the currency is going to be tense. So at some point it’s going to be very difficult to say let’s just maintain the exchange rate that’s completely out of sync with the underlying market pressures and you might see further depreciation. If the currency stabilises at this point I think at least the fears of a mercantilist kind of strategy should abate. But let’s not forget that even with exchange rates being stable, Chinese exports have been sluggish for a while, as have ours, all of which point to the proposition you’re making that the global growth is slower than we’ve expected. I expect to see very very aggressive selling by the Chinese, that’s something we have to prepared because there are lots of things that China sells to us which compete very directly and aggressively against our producers. So all of this labour intensive exports, textile, electronics, all of those things, footwear, appliances, the sourcing for these could shift very quickly and I think that’s something we’ve got to be concerned about.

Author

Subir Gokarn

Former Brookings Expert - Brookings India

Executive Director - IMF

Get daily updates from Brookings