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Home > Blogs > Ian Fraser > Don’t count chickens on recovery

Don’t count chickens on recovery

Finance Blogger: Ian Fraser Ian Fraser

By Ian Fraser in Doha

There is a danger that central bankers including Jean-Claude Trichet of the European Central Bank and Ben Bernanke of the Federal Reserve will hold interest rates too low and for too long—just as their predecessors did after the terror attacks on the United States in September 2001.

Speaking at the launch event of QFINANCE in Doha on Wednesday, Rajar Kumar Gupta, senior partner emeritus at management consultants McKinsey & Co, warned that keeping money cheap too long could compound the crisis by giving rise to inflationary pressures and the blowing up of new asset price bubbles. (Note: if you’re interested in learning how to spot bubbles before they burst, read the Viewpoint of QFINANCE contributor James Montier of Société Générale).

Gupta, who was addressing the FT Rethinking the Future of Finance conference in the Qatari capital, said the alternative risk is that governments will withdraw their stimulus packages too soon and choke the economic recovery.

The European Central Bank governing council member Vitor Constancio warned on September 29th that the premature withdrawal of stimulus packages could dent economic growth. Speaking at a gathering of central bankers in Lisbon, Constancio said: “There is major uncertainty about global recovery’s magnitude and sustainability. Possible premature withdrawal of budget stimulus poses risks.”

From their pre-crash recklessness and cavalier lending, Gupta said the world’s banks have swung too far in the other direction, shifting towards excessive caution. He warned that the banks’ new-found tightfistedness could lead to a Japan-style lost decade of economic stagnation.

Gupta said he believes that today’s biggest near-term business and commercial opportunities are going to lie in developing nations of which the Gulf region is definitely one. He said that the emerging economies, especially India, have much to be proud of in terms of the effectiveness of their regulators and their central banks.

Gupta said one of the critical problems facing the global economy and one that may give rise to future bubbles is the continuing imbalance between the US and China. He said that annual consumer spending in the US is $11 trillion, but in China it is only $1 trillion.

Speaking at the same event, Gerald Corrigan, managing director of Goldman Sachs, said one of the legacies of the crisis is that risk monitoring and risk management will improve. “They are both improving and they will improve even further.

“One of the big pluses of this crisis is that no-one is arguing with the proposition that we need higher capital adequacy ratios. I believe many of these sorts of changes can be [accepted] without the need for heavy-handed regulation.”

Max Taylor, chairman of Mitsui-Sumitomo Insurance London Companies told the conference: “There is some cause for optimism but there remains much to do.” Gupta warned that the politicians at the recent G20 summit in Pittsburgh may have been presumptuous in their confidence that recovery is happening. “We are very much in uncertain times,” said Gupta who has been with McKinsey since 1973 and was its worldwide managing director from 1994 to 2003. He added that “uncertainty” is something businesses will have to contend with for some time to come.

Tags: capital adequacy , central banks , economic recovery , fiscal stimulus , interest rates
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