A build-up of “dry tinder” in the global financial system is threatening to spark a repeat of a major crisis that would overwhelm regulators’ defences, former US Treasury Secretary Tim Geithner warned last night. "Misfortune tends to overwhelm even the best defences," Geithner said.
A further crisis might not emerge for decades, he said. But he suggested that regulators should be better prepared and have the "right tools" to act if and when a new crisis arose. Not enough attention was being paid to "the fire station", he said in the annual Per Jacobbsen lecture given at the IMF.
However, when questioned by GlobalMarkets after the speech, Geithner, a former President of the New York Federal Reserve who is now president of private equity firm Warburg Pincus, declined to comment on what would happen when interest rates rose against a background of record high global debt.
Tim Adams, the president of the Institute of International Finance, said the world economy needed to "find a new growth model" if was to cope with the threat posed by record high and fast-growing levels of global debt.
"My major worry is the continuous increase of debt across all economies, across household, sovereign and corporate sectors, juxtaposed with falling productivity, declining returns on investment and falling marginal efficiency of capital," he told GlobalMarkets.
Adams, a former assistant secretary for international affairs at the US Treasury, talked to GlobalMarkets shortly after German finance minister Wolfgang Schaeuble also sounded the alert against the consequences of record high debt levels and record low interest rates.
"At some point, you have got to square the circle," said Adams. “Ideally, we should find ways to improve productivity. If we don't, then the debt [accumulation] will have to be dealt with at some point.
"The issue is we are getting more and move levered up and yet we are getting less and less growth for it. We need a new growth model if we are going to continue like this."
SLOWBURN WORRY
Adams said he was not worried about the short term impact of a further rise in US interest rates. "I think this is the most-telegraphed rate hike in history," he told GlobalMarkets. "I worry more about where we might be longer-term, when historic levels of debt [combined with] interest rates going up," he said.
Meanwhile Goldman Sachs (Japan) deputy managing director Shigemitsu Sugisaki, who is a former deputy managing director of the IMF told GlobalMarkets: "I am beginning to have some concerns about the cost of unconventional monetary policy, particularly quantitative easing.
"It has an impact upon global liquidity and therefore debt is accumulating. One aspect that we have to consider is [whether to] pursue quantitative easing. There is a benefit, of course, but the other side of the coin has to be carefully reviewed.”
The consequences of the debt surge are issues that have to be considered "for the future - not right now," said Takatoshi Ito, professor of international affairs at Colombia University.
Much will depend upon how productivity, investment and consumption trends develop Ito, who is a former economic advisor to Japanese prime minister Shinzo Abe, told GlobalMarkets. "Monetary policy has been doing as much as it can and I am in the camp that thinks monetary easing has helped. We will see how the exit [from unconventional monetary policy] can be done and whether debt levels will go down gradually."