Central Bankers Roundtable
by Sarah Miles
October 15, 2014
In one of the first afternoon sessions on Wednesday of the 15th World Knowledge forum, a panel of former central bank governors gathered to share their thoughts on the status of the global financial system. The overall outlook of the group was positive, but the panelists also gave advice on how to maintain the positive trend. Jacob Frenkel, former Governor of the Bank of Israel, described the current situation succinctly.
“The system is absolutely safer, but that does not mean there is no trouble and we can go to the beach. Trouble often comes from directions we cannot know, so supervision has to be clear and strict,” he said.
Looking back on the actions of the central banks in response to the financial crisis, Jean-Claude Trichet, former President of the European Central Bank, praised the speed with which the banks were able to come up with a solution.
“We were called on to have a non-conventional way of taking decisions, and we responded with rapid, swift, and bold decision-making,” he said. “What all central banks in the world are doing is exceptional, and it’s justified because the situation remains exceptional.”
Dr. Frenkel strongly agreed with Mr. Trichet’s assessment, saying, “When history is written again and judgment is made, the central banks’ actions will get extremely high marks.” He expressed confidence, even in hindsight, in the correct decision made by the banks at the time.
The former Governor of the Bank of Japan, Masaaki Shirakawa, echoed the feelings of his co-panelists, but also brought attention to the need for future changes to the global financial system to ensure sustainable stability.
“Time bought preciously has to be used cleverly to tackle fundamental issues,” he stressed.
For Mr. Trichet, a lot can be learned from the past experiences of the central banks. One area in which he sees room for improvement is the communication between the banks and their respective governments.
“On messages to government and parliament, perhaps we could have been more assertive,” he said. “We need to help our partners realize their responsibility so they don’t waste the time given to them by the central banks.”
Dr. Frenkel also urged caution in focusing too much on monetary policy. While the flexibility and responsiveness of monetary policy makes it an attractive option when swift action is needed, ignoring fiscal policy and structural reform can cause an overburden on monetary policy.
He explained, “It’s dangerous because focusing on the side that does move can cause the rigid side to become even more paralyzed.”
In a similar vein, Mr. Shirakawa emphasized “the importance of striking balances” between regulation and monetary policy, as well as between regulation and supervision, in order to continue financial recovery.
The speakers’ final recommendation for the future of the central banks is to focus on globalization of the financial institutions. Mr. Shirakawa explained why this will be an especially difficult task to accomplish.
“We call them central banks, but with rapid globalization we really can’t call them that anymore. It would be better to call them local banks. And we have to think of global interests, but at the same time each bank is governed by the banking laws in each country, so we need to conceptualize this global imbalance,” he said.
Mr. Trichet conveyed one positive aspect of global cooperation he observed during the recent financial crisis, and one that he sees playing a key role in the future of global economics.
“During the crisis, the fact that there was a G20, a group of us working in concert, gave us the confidence that we were together and would be able to surmount the difficulty with our joint efforts,” he said.