SocGen: How The World's Central Bankers Are About To Make The Next Huge Policy Blunder

ben bernanke

Photo: AP

Central bankers and treasury leaders have spent a lot of their time blaming traders’ psychological flaws as the reason behind the financial crisis.Dylan Grice of Societe Generale uses their same tools of behavioural psychology to show why central bankers cannot see their own errors in judgment until it is too late.

He explains why they couldn’t predict the last crisis, and why they won’t be able to foresee the next.

We’ve been here before, and we’re going there again. But this time its about giving up stimulus and controlling debt that central bankers and treasury leaders simply can’t understand.

This is why central bankers are about to make the next big policy mistake >
 


Ben Bernanke: He missed the mortgage crisis

Bernanke said that a mortgage crisis was unlikely because one had never happened before. This analysis was flawed because it 'framed' his understanding of now through a history that never included such an event.

Source: Dylan Grice Societe Generale Cross Asset Research

Ben Bernanke: And he didn't see the signs on subprime

Bernanke also thought that subprime would just be an isolated incident and wouldn't bring down the rest of the economy with it because it hadn't already. This is what is called 'recency bias,' or assuming because it has not happened recently, it is unlikely to happen.

Source: Dylan Grice Societe Generale Cross Asset Research

It was the most regulated institutions that failed so miserably

It was Fannie Mae and Freddie Mac, which were highly regulated, that were at the very centre of the crisis.

Source: Dylan Grice Societe Generale Cross Asset Research

AIG's faulty unit was designed to get around regulations created by central bankers

AIG's financial services business helped companies get around Basle requirements, a key regulation on capital requirements for banks.

Source: Dylan Grice Societe Generale Cross Asset Research

Gordon Brown: Let the bubble blow when he was Chancellor of the Exchequer

Gordon Brown had no idea about regulation policy when he was in charge of the Exchequer, as he let Britain's bubble blow all the way.

Source: Dylan Grice Societe Generale Cross Asset Research

Alistair Darling: Wants more stimulus now, debt payoff later

Darling wants to continue the stimulus now in the hope that growth can pay off the debt.

But when will they know to give up the stimulus? And will they have the political will to do so?

Source: Dylan Grice Societe Generale Cross Asset Research

What they are missing: Massive unfunded pensions off balance sheet

Pensions make up a massive chunk of government debt, and its all off balance sheet and never paid attention to by central bankers or policy makers.

Source: Dylan Grice Societe Generale Cross Asset Research

What they are missing: Massive unfunded health liabilities off balance sheet

The same goes for health liabilities like Medicare and Medicaid.

Source: Dylan Grice Societe Generale Cross Asset Research

Off vs. On balance sheet assets

Off balance sheet debts dwarf on balance sheet debts for many countries.

Source: Dylan Grice Societe Generale Cross Asset Research

Balance that should be run

These are the balances countries should be running in order to stabilise on balance sheet debt.

Source: Dylan Grice Societe Generale Cross Asset Research

Balance that is being run

These are the actual balances countries are running, not in line with what they need to balance debts.

Source: Dylan Grice Societe Generale Cross Asset Research

Key offenders: Japan

Surplus Required: Over 3% of GDP

Actual Balance Run: Nearly negative 5% of GDP

Source: Dylan Grice Societe Generale Cross Asset Research

Key offenders: Norway

Surplus Required: Nearly negative 2% of GDP

Actual Balance Run: Nearly negative 5% of GDP

Source: Dylan Grice Societe Generale Cross Asset Research

Key offenders: UK

Deficit Allowed: About 0.3% of GDP

Actual Balance Run: About negative 2.5% of GDP

Source: Dylan Grice Societe Generale Cross Asset Research

Key offenders: U.S.

Deficit Allowed: About 0.5% of GDP

Actual Balance Run: About negative 3% of GDP

Source: Dylan Grice Societe Generale Cross Asset Research

Credibility Chart: We don't have any

There is a gap between the required surplus and where we need to be. And this is just on balance sheet debt.

Source: Dylan Grice Societe Generale Cross Asset Research

Fiscal Contraction: The pain would be politically unbearable

Including off balance sheet debt, the required fiscal contraction is unbearable, and certainly politically unfathomable.

Source: Dylan Grice Societe Generale Cross Asset Research

Central Bankers missed the causes last time, will they not see the warnings on debt this time?

For the world's central bankers and treasury leaders, stimulus is like heroin. They're addicted.

Do we believe they will give it up to pay off their debt when the time comes?

Are they politically strong enough to do so?

Source: Dylan Grice Societe Generale Cross Asset Research

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