hello there i'm marinated this is boom bust and these are some of the stories that we're tracking for you today. first up we're talking about debt in all its forms and glory today the good the bad and the ugly of portugal's a bank though it's fair to say resolution plan is a top of the deck and what the rest of the eurozone can learn from it then william white is on the program the former chief economist of the b. i asked and current chairman of the economic development and review committee is joining us live on the show today. to discuss ultra easy monetary policy and whether public and private debt is still a problem they face crisis now also in today's big deal edward harrison and i are going to be sticking with this whole debt theme will be looking at public and private forms of it and again how much of it exists post-crisis you want to miss a moment actually gets in that it all starts right now.

with. our lead story today debt more specifically debt in the context of portuguese bank spirit. now late sunday portugal's central bank unveiled a four point nine billion euro or six point six billion dollars rescue plan for a bank or a spiritual song to the central bank revealed the plan to rescue the country's second largest lender by breaking up the bank and pumping billions of euros worth of state money into it as spiritual santo provided loans to its parent company euro fin holdings which is a luxembourg based conglomerate which has run into some trouble lately after an auditor accounting irregularities last month and the bank also sold billions of euros worth of debt to. own customers now under the four point nine billion euro

plan depositors and senior bondholders will be sparred while the banks non senior creditors and current shareholders will have to absorb the losses now most of the banks deposits branches workers and operations will be transferred to a new entity or a good bank controlled entirely by the bank of portugal called novo bank now while bank our spirit has problems those problems assets they'll remain with the bad bank and losses will be absorbed by shareholders subordinated creditors like i mentioned before now basically the banks current customers and senior bondholders will be protected so funding for the bailout comes from the bank of portugal's resolution fund which is a mechanism designed to help control banking sector risks a loan from the state will provide the resolution fun with additional capital which it will likely need now in a statement the bank said quote nothing changes for the customers who will be able to carry out all operations as usual and without disruption the contents of the

contractual relationships with the customers remain unchanged now euro zone banks are still far far from perfect but the leaders have given themselves the tools to calm market panic by creating a permanent bailout fund known as the european stability mechanism and are putting in place the essential elements of a banking union the e.c.b. is reviewing the assets and resilience of the region's most important banks and eurozone states of agreed to rules on how to rescue or wind down banks that do find themselves in some trouble so will the plan in portugal prove successful we'll just have to wait and see. to get a better feel of what's at stake here we wanted to. talk debt with william white so

white is chairman of the economic development and review committee the organization for economic cooperation and development or c. d. now he's also the former economic advisor of the monetary and economic department of the the bank of international settlements and just a bulk of his resume a little because it doesn't seem bulky enough white also served as an economist at the bank of england pretty impressive stuff now with monetary authorities engaged in this ultra easy monetary policy the question is whether public and private debt is still a problem so here to answer that question i turn to you mr bill according to your former employer the bank of international settlements the global economy has shown encouraging signs over the past year now they're worried is that the forces that led up to the great financial crisis are still at work so here's my question do you share these concerns and if so why go ahead salute you share their concerns. i think at heart this crisis has come with the it started in two thousand and seven

came at the end of a long period of time in which debts were allowed sort of cycle after cycle to build up and unfortunately since the crisis began in two thousand and seven whereas we might have hoped for the kind of dream to reverse some of that excess debt fact of the matter is the debt i think in the g thirty or g twenty as a proportion of g.d.p. or something like thirty percentage points higher than they were before so if the period prior to the crisis was an accident waiting to happen i have significant figures that things are as bad if not worse today the. start of positive thank you bill how on her by now i know that you're widely credited with having given a cassandra's warning on private financial for jodi well before the great financial crisis so what signal to you pre-crisis that private debt was going to be a problem. i mean this is not rocket science if you go back in history

what you see you remember this book by ken rogoff and carmen reinhart if you go back in history you see example after example of these credit fueled gracie's credit fuel booms that end in boston and in crisis you know my own personal experience i think was i started following japan very very closely prior to the japanese crisis and when i moved to the b. i asked what i saw almost immediately was a build up of symptoms of things going wrong in southeast asia and in the united states that just reminded me a lot of japan and then of course we started reading some of the history and realize that there was a long history here so it really it's not complicated mathematics it was just having an open mind and a willingness to look at history and i think essentially that's all i'm trying to do today though you know as i understand it the fed introduced the first round of

quantitative easing for entirely and i mean entirely different reasons and i introduced subsequent rounds of q.e. now q.e. one was all about being the lender of last resort but the other curious about boosting the economy so is that how you see it as well and do you think curious problematic. and i absolutely agree with you. the certainly the fed the motivation for what they were doing in q e one was a very very different from q.e. two and subsequent activities of the first thing really had to do about the central banks role lender of last resort and trying to restore financial stability the second rounds and the subsequent rounds in the forward guidance and all the rest of it is really designed to increase aggregate demand and one of the principal ways that they're trying to do it is by boosting asset prices in the hope that the perception of increased wealth will result in more consumption and more investment

and whatever it's a very very different purpose and i think there's lots of reasons to doubt that it's actually going to work now many would say that there's a certain trickle down feel to q we do you think that's correct. well one of the worries is the i think there is an element of trickle down. but only an element the fact of the matter is that if the gains particularly on the stock market in and the narrowing of spreads in financial markets if the gains are going particularly to the rich as they are because they're the people that tend to own most of these things whereas the middle class people are mostly orany earning who can i say have assets that yield a rate of interest which at the moment is very very low if the richer people basically are not going to spend this in part because they realize that it's only a temporary gain then it's going to trickle down a little bit but i think the. the the full implications for aggregate

demand will be significantly less and indeed have been significantly less than the fed has has and dissipated. built many of the people that i speak to the use the word secular a lot because they think the long term matters more than the short term so do you think policy makers are geared to long term at all i think the real problem aaron has been that policymakers bankers regulators politicians versus anybody you want virtually anybody you want to think about who has been a party to what has happened up until now i think if you accuse them of short termism it would be an accusation that i think the judge would say is a is an appropriate one. i think there is far too little thinking about the longer term implications of what's happening and that's one of the reasons why i'm sort of sympathetic to the b.o.'s as arguments about is it time to pull the pull the plug

on quantitative easing and all the rest of this stuff because my sense and i think the b.o.'s a sense is that the positive benefits being derived for aggregate demand are going down over time whereas the unexpected in undesired consequences medium term consequences are going up over time and these two functions cross of a certain point in time it which point you have to conclude that the policies are doing more harm than good and we should we should think seriously about stopping them now on our show we've had a number of economists who have come on and referenced hyman minsky and that's the way to qana mr coined the phrase the instability of stability so to what degree has the work of time in minsk informed your view on debt cycles. well i think i mean minsky is is is a very important figure in the history of economic thought and certainly i've read

a number of his things although i'm not an academic you know i think when you're at the b.o.'s you're preparing one hundred meetings a year and you've got so much to do you don't really have time to sit down and read a lot of economic history but certainly high minsky and the idea that the banks could really get you into trouble that instability could breed serious stability could breed instability. in the medium term effects of ponzi schemes and the rest of it all of that really resonated with us but in addition i mean you have to go back to other thinkers too like vix in the high. richard coo for that matter there's a lot of people who saw that there are a lot of different ways in which things can go role and. i think in a sense what people find it hard to really understand is that there's no magic bullet in all of this stuff if the economy is really

a very complex adaptive system it can break down in a lot of different ways it's not just about one hill i'm so sorry to cut you off but i'm being told that we have to go to break but please don't go anywhere because we want to continue this i'm glad that you bring up ponzi because i want to talk about that when we return but like i said it's time now for a quick break but stick around because william white isn't going anywhere he's coming back with us to continue our debt discussion however will be hopping the atlantic to focus a bit more on euro bland debt then in today's big deal edward harris and i are sticking with the whole debt theme and we'll be looking at public and private debt and how much more of it exists post chris and remember you can see all segments featured in today's show on youtube youtube dot com slash boom bust our t.v. and on. hulu dot com slash boom bust now before we go here are a look at some your closing numbers the bell.

in justifying their stance better citing all sources of what they see as international precedents in cost of the coming referendum once called london but the response that they're hearing from the west is that what you're saying is illegitimate but what we've been doing is still full of life the measure if you break into they're still good what america does is right. for other people for sundries like russia or all countries like australia but whatever america does is right because america doesn't.

they just want to keep building allowing saudi arabia qatar and iran to fund millions and millions of pounds worth of building of mosques in this country where they have them addresses where cover and we have a hundred thousand four to sixteen year old children who are being schooled in these were trusses which is encouraging complete non integration within the society . to. the.

rules in effect that means you can jump in anytime you want the glen. dramas that can't be ignored. stories others refuse to notice. places change lights never. sold picture to say. the least. from around the globe to the brooklyn. and we're back now with william white of the organization for economic cooperation and development mr wright thank you for sticking around now we just learned that

the portuguese bank banco asparagus ontario is splitting into a good bank and a bad bank and the equity and debt holders will take some losses there now it brings up the question it's a pretty good question in what way does the banking system transmit or amplify the financial distress of ponzi bars to the rest of the credit system. well i think this is. a very good question and entirely pertinent to what's going on in portugal the fundamental problem is that have banks have made bad loans if you want to put it sort of you know ponzi loans in the end but they made bad loans and the loans are going sour there's a tremendous tendency for the bank particularly if it's worried about its own survival to simply pretend that the bad loans are good loans until evergreen the loans by providing more money to pay the interest etc etc while all that's going on of course it is completely preoccupying for the management and the question of new

arms and particularly new rooms for innovative purposes the banks are not prepared to do that and that has real implications for the rest of the economy because the credit is then not getting through to the people that really need it in order to get the economy moving again. bill i want to ask you under what conditions do you worry about inflation. what conditions do i worry about inflation. a number of conditions i mean i want to be perfectly clear i have not been surprised up until now that there has been so little inflation because essentially up until now there's been an awful lot of excess capacity in most economies. and people's inflationary expectations have been maintained fairly fairly fairly robustly around sort of target level so i'm not surprised up until now it's not been so bad but there are risks going forward i mean one of the risks is that

people just simply make a mistake ok so that if you're conducting monetary policy in terms of the gap between aggregate demand aggregate supply the honest truth is we've got very little understanding of what what the level of potential put in the economy is it is all very much a black box subject to enormous uncertainty because of what the crisis has done to potential so it is not impossible that people will make mistakes in an inflationary direction the second thing that is worrisome and we've seen this a number of times in history is that if the fiscal situation is essentially out of control the government's got a big deficit the government's also got a very high debt level it's we've seen before a situation in which people's people start to worry that the government is going to force the central bank to print the money the so-called fiscal dominance and once

that sort of sensed starts to creep in you that you could see inflationary expectations start to move pretty quickly we've seen it before in history. now that this is not a prediction i'm saying it is possible. thank you for that clarification i want to talk about this the middle class in the u.s. and europe is still very very indebted but hasn't enough do you leveraging occurred to rule out another large scale financial crisis. i'm sorry i missed that erin please so you know the middle class in the u.s. and the u.k. mean europe not just the u.k. it's still very indebted but has another deal leveraging occurred to rule out completely another financial crisis a large scale financial crisis i should so. no i don't believe so i don't believe so the the honest truth is that the only place as far as i know where there's been a significant degree of household d.-d. verging. is in the united states and that really has to do with the rather peculiar

character of the you know the jingle mail and whatever but virtually everywhere else there's been very little progress that's been made overall if you add in the government debts in addition to the household debts debts are higher now not lower and there are a number of countries where they haven't really had the crisis because their banking system continued to make mortgage loans throughout the crisis and i'm thinking about my own country canada all the nordiques and a number of others and in those countries household debt levels are absolutely at record levels household prices are absolutely at record levels and this is another source of vulnerability going forward so no i think this thing is over no i don't how much is public debt a factor here particularly in the euro zone. well public debt can i say this martin wolf and many other people are quite right in suggesting that if you have

a situation in which private sector debt is too high they must cut back on their spending in order to save more and reduce the host or debt it is the government's job to step in and as it were absorb the or to mitigate the downward tendency in overall spending and that's a good thing but it is got to be. done in the context of some kind of plan of getting the whole thing under control over time and one of the worries that i have is particularly in the united states with the way your political system works what we know is that there isn't a plan and therefore there is a vulnerability in europe my own personal view is that there's been too much upfront austerity but there's no question that there's a general commitment to keeping everything under control on the fiscal side over

time and that's a good thing. now the euro zone is operating under a different institutional structure i think when countries like japan the u.s. or the u.k. in where the national governments have sovereign currency supported by unlimited financial resources of the national banks that those countries so do you think this limits fiscal space in the eurozone and if so is that a good thing. well i think it i think it does limit the fiscal space. in the sense that you recall the story. in the same sort of way as the historical defining event in the us was the great depression i think the a story called defining event in europe was the big government deficit in germany and in central europe that then morphed into hyperinflation and that's really sort of what the germans in particular are concerned about and right from the start any efforts. to

increase fiscal spending and or to allow the e.c.b. to support fiscal spending elsewhere has been very very firmly resisted by by the germans and by the central europeans. short. i think it's bad. for you because good i mean that's that's the challenge that we all face is trading off the short run versus the long run it is hard but you know what mr what you have been like thank you so much is such a pleasure talking to you and i hope to have you back on very soon that was the chairman of the economic development and review committee at the organization for economic cooperation and development time now for today's big.

big deal time with the wonderful edward harrison and today we're discussing debt public and private so according to the irish independent the average person's debt on credit cards utilities and other unsecured loans is five times larger than it was at the beginning of the recession in two thousand and eight. there has also been an increased amount of people declaring bankruptcy for awesome stuff so edward what's going on in ireland talking about this is a. that's a good little country to segue into this whole thing because ireland suppose of the country that is doing the best in the periphery so if you think about you know there were the core countries in europe germany austria those countries the netherlands and they had the periphery which was ireland spain and a bunch of other countries and ireland has done the best supposedly but here's a country that still has a lemon and. unemployment you have a quintupling of your unsecured credit in the in the in the country and house

prices are still forty percent below where they wore at the peak so we're still in a world of her in ireland and the debt is still there because they haven't been able to restructure that the minimum the private and then the public debt has gone from twenty four percent of g.d.p. two hundred twenty three percent of g.d.p. so one hundred percent increase now and we know that the whole world was hit hard by the current financial financial crisis but ireland particularly hard so i want to ask you you know how does this compare to debt consumer debt here in the u.s. consumer has gone down somewhat but if you look at the trend over the last fifty to sixty years we're much of a higher level than we were in say the fifty's the sixty's or the seventy's we're probably on par with where we were at some point during the one nine hundred ninety s. so in terms of did love or gene if we had a recession the potential for massive d.

leveraging is definitely still there and i think that you know what william white was saying about the fact that you know in aggregate if you look at the g twenty thirty percent more public and private debt together than we were before it says that in terms of the plans that we're trying to work out how to get out of this hole there hasn't been enough credit right there haven't been enough you know there's not been enough. wiping the slate clean and people started it would just actually trying to. it's aggregate demand by increasing the amount of credit and that was the problem to begin with and eventually you know the fifty's and the sixty's that it how does this go back to wages were we just borrowing to buy now and therefore we want what what does this really come down to your. view is that we've seen a stagnation of wages over larger period of time with the forces that are behind that are difficult and it could be the fact that you have a whole group of people whole swath of people in asia coming online that weren't

there before that are very well educated they're competing for wages with people in the west in the united states and in europe and so middle class wages have stagnated and while they have stagnated at the same time interest rates have gone so what do you do in order to make up the shortfall a lot of people taking on debt and i think that's where we are and. you can't get interest rates to get out of the for the so really that game is sort of played out and that's why we're getting this huge massive beloved you know it's pretty scary stuff but you know i saw something by joseph stiglitz on debt restructuring basically and what does this have to do with what william white was talking about earlier you know was think you know we're looking at potentially i think the stiglitz the one you're talking about is in argentina so argentina defaulted and i think that we are looking at potential default even within the euro zone we already had one with greece right greece was actually upgraded by moody's very recently but

nonetheless they still have a debt to g.d.p. government debt to g.d.p. of one hundred eighty percent this is higher than it was in argentina so the question is how are they going to be able support this without some sort of backstop from the e.c.b. so i think that what stiglitz was pointed out is that when it comes to sovereign debt restructuring is a messy thing the whole thing that happened with regard to the vulture funds getting in on argentina makes it. it's more difficult to have these restructurings because you're always going to have these holdouts how do you get rid of that public debt so the concept that you can go from private debt and then keep it on to the public belted the way that irene has done and i'm sorry we got to go i'm sure this will be the last time we talked about that thank you so much that's all for now please check out our facebook page facebook dot com slash boom bust our t. please tweet at us at erin aid at edward and it's from all of us here have been best thank you for watching we'll see you next time.

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