Yellen frets US may not be able to handle new risks
Former Fed chief sees lack of appropriate tools
HONG KONG: Former Federal Reserve chair Janet Yellen warned the US might struggle to cope with problems as lending risks migrate to non-financial institutions from banks.
“We are more attentive to the emergence of risks outside the banking sector, but it’s unclear that we actually, at least in the United States, have appropriate tools to deal with these,” Yellen said at a panel discussion at the Bloomberg New Economy Forum (NEF) in Singapore.
The authority of US banking regulators to deal with risky debt is limited, she added.
Opening the second day of the forum – organised by Bloomberg Media Group, a division of Bloomberg LP, the parent company of Bloomberg News – former Treasury Secretary Hank Paulson issued a stark warning that an “economic iron curtain” could emerge as the US and China throw up walls on each side. Paulson warned that pushing a harder line may backfire.
“In its effort to isolate China, the United States risks isolating itself,” Paulson said.
The US-China economic confrontation was a recurring theme on the first day of the NEF. Henry Kissinger – who helped broker the US’ 1970s rapprochement with China – said he was “fairly optimistic” a wider clash could be avoided, but warned that failure would “destroy hope for world order.”
Yellen was joined on a panel by Ravi Menon, managing director of the Monetary Authority of Singapore.
He noted that loose liquidity and expansionary policy in developed economies had led to a build-up of debt in emerging markets. In ramping up their dollar borrowing, such economies become exposed to a strengthening greenback and rising interest rates.
Menon set out some ideas for managing spillover effects of global policy moves: regulatory coordination; monetary policy guided by domestic mandates but recognising effects on other countries; and a global financial safety net.
“If you have global capital markets, you need some form of global financial safety net – that is sorely lacking today,” Menon said.
He called for a mechanism to prepare for a global dollar shortage, similar to the Fed’s dollar swap lines during the 2008-2009 crisis.
Yellen said the International Monetary Fund was the “logical” entity to take the role of lending to those who need liquidity. While the Fed could do it in crisis, she said, it’s hard to make the case outside of those circumstances.
The third member of the panel was Sri Mulyani Indrawati, Indonesia’s finance minister, whose economy has shown solid growth, low debt, modest current-account deficits and restrained inflation.
Yet its currency has tumbled more than 8% against the dollar this year and the central bank has been forced to repeatedly raise interest rates as the Fed tightened policy.
Indrawati made the point that the Fed needs to pay attention to the knock-on effects of its policies.
Yellen had struggled with this criticism when she was at the helm and current chair Jerome Powell is now receiving it – despite both insisting they keep international risks in mind.
The problem, as Yellen pointed out, is the Fed is congressionally mandated to put America first. — Bloomberg
If you have global capital markets, you need some form of global financial safety net – that is sorely lacking today. Ravi Menon