Leading Economist predicts another Housing Market Crash
‘Look out, we are heading for a crash again’, warns William White, the central banker who predicted 2008 crisis
World faces a crunch that could see a collapse in London property prices.
Despite 2008 crisis being caused by debt, the levels have since risen
Overall debt has gone from 200% of global GDP in 2007 to 250% now
The world is facing a new crisis caused by an explosion in debt. So warns William White, the central banker who famously predicted the crisis of 2008.
As financial markets reeled last week and fears of a fresh recession or even banking crisis sparked panic, White was more than willing to issue yet another prophecy of doom.
The world is now facing a crunch that could see a collapse in property prices, including those in London; a new global banking crisis; waves of cheap commodities savaging Western industrial centres; and the need for debts to be written off on a grand scale.
Rather than being better placed to survive, the world is actually worse off than it was in 2008, he argues.
‘At each stage what’s been happening is the imbalances in the global economy have been getting worse and worse.’
White issued his first warning to central bankers in 2003 at their regular meeting at America’s Jackson Hole. At the time White was economic adviser to the Swiss-based Bank of International Settlements – often dubbed ‘the central bankers’ central bank’.
White now works part-time at the equally prestigious Organisation for Economic Co-operation and Development, but Britain has played a significant role in his life.
Although Canadian-born, he attended the University of Manchester and his first job was as an economist at the Bank of England.
And the 72-year-old has particular warnings for the UK, notably on its property market and the risk to British industries such as steel. But the picture he paints is of a fresh global crisis.
Cheap money has led to an explosion in debt, taken on by governments, households and companies – and despite the 2008 crisis being caused by too much debt, the levels have risen since, he says.
‘Overall debt has gone from 200 per cent of global GDP in 2007 to 250 per cent now. The deleveraging hasn’t happened,’ he said, by which he means companies, households and governments have not paid back enough debt to be ready for the next crisis.
Britain – and London in particular – could be vulnerable in relation to house prices.
‘Property prices particularly in some bigger places like London, Sydney and Paris would be deemed on the rich side.’
His own son, he says, has just moved from Vancouver in Canada to Victoria because he can no longer afford the property prices.
‘I would consider all of these financial and real assets where they have risen to historically high levels, to be vulnerable.’
At the very least he expects the world to ‘hunker down’.
‘The banks are going to say the whole world has got very risky. They will be biased against lending to anyone who isn’t a number one credit. Consumers are going to say I may have a job today, but maybe not tomorrow and they will focus on repaying debt. Everybody tries to save at the same time,’ he warns.
He worries too about a wave of deflation from China, arguing the world is facing an oversupply of things it does not need.
‘Look at China where they have got massive overcapacity in steel, glass, ceramics. They are going to send this our way, you can already see this with the closure of the steel plants and mills,’ he says, referring to closures of a number of British steelmakers within the past few months.
Britain’s banking system could come under pressure too, he says, even though Britain has done more than most countries to ensure its banks have set aside bigger capital buffers to cope with disaster.
‘The next question is the extent to which the financial system is now vulnerable to the bankruptcy of some of these companies.’ White is convinced a debt reckoning is coming; he is less sure, however, when it will happen. He admits he has repeatedly thought a crisis would come sooner, and that recessions are impossible to predict.
‘What you can say is that everywhere you look, what you see is economies labouring under growing difficulties. You can see potential trigger points, but there are real limits to our understanding. Predicting exactly what will happen and when is impossible.’
He also admits that in the past he has underestimated the extent to which central banks can reinvigorate economies with dramatic interest rate cuts.
But, he argues, that today there is one reason to think central banks, including the Bank of England, may have reached the limit of their powers. With most central bank interest rates close to zero, there is little room for more action.
In the UK rates are at 0.5 per cent. Some have raised the idea of further cuts in rates, including the Bank of England’s own chief economist Andy Haldane. White, in fact, singles out Haldane for praise saying he is ‘thinking very much outside the box’ and has ‘understood the complexity’.
Some, though as yet no one at the Bank of England, have even raised the idea of negative rates in the UK (in effect charging banks to put money on deposit at the Bank of England). Negative rates are already in place in a number of countries including Japan and Sweden.
White warns, however, they may actually make matters worse. ‘I am not sure I want negative rates to work. It’s the last refuge of the scoundrel,’ he says.
The point he argues is that low rates – and negative rates even more – may make a banking crisis more likely rather than less.
Banks will be charged to leave cash at central banks but may not realistically be able to charge ordinary customers for putting cash on deposit. They would need to make up the profit somewhere else.
‘It squeezes bank profit margins, so they might charge more to borrowers, which would be the opposite of what low interest rates might be expected to do.’
The recent economic worries and the slump in stock markets and commodity prices have been widely laid at the door of China and other emerging economies whose breakneck growth may finally be slowing.
For White it is again the debt these economies have built up – mostly borrowed in dollars – that is part of the threat.
‘The total US dollar denominated credit to non-banks in the emerging markets is $3.3 trillion (£2.3 trillion). That’s up from less than $1 trillion (£690 million) at the beginning of the century. It has exploded since 2009. In Brazil and China that debt has gone from 150 per cent of GDP to 200 per cent of GDP.’
Some argue that if those economies grow quickly they may will easily be able to pay those debt bills, but White is not so sure as the value of the currencies of these emerging economies has fallen, making it harder for them to pay their dollar (or indeed sterling) debts.
‘The idea they will power their way through it is doubtful,’ he says.
White thinks governments need to invest in infrastructure, and that those governments without big debts need to spend. ‘You need more public investment and infrastructure investment,’ he declares, a case that in principle our own Chancellor George Osborne agrees with, though critics argue he has not yet done enough.
White may be 72 and part-time at the OECD, but he is still very much part of the global financial community and made his way to the Swiss town of Davos last month to attend the World Economic Forum. That, however, is not far from home for White is now a permanent resident in Switzerland.
‘I am still very, very active,’ he says. ‘Having spent my whole life in this, I find the whole thing fascinating.’
As in 2003, White’s view of a looming disaster is disputed by many economists. But he is confident that the imbalances in the world economy will lead to a new crisis.
‘At a certain point when something is unsustainable it will end,’ he declares. Then he adds: ‘But it can also go on longer than you expect.’
White, it seems, is prepared to wait for as long as it takes to be proved right.
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