How to avoid the next financial crisis? | MICHEL GIRARDIN | TEDxGeneva

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I was trying to impress my daughter by

telling her I was going to give a TEDx

talk and she said ah that's interesting

dad and what's your subject I said how

can we avoid the next financial crisis

and she went dad are you serious I mean

come on that's so easy you just go there

say can we avoid the next financial

crisis of course not and you walk away

end of talk and I said hey hey hey hang

on a minute take a look at this chart

and she went now what is this chart it

shows you the performance of the stock

market worldwide and she said ah stock


that's your stuff I don't even vest in

the stock markets that's your game in


I said yes you do you're working if

you're not investing in equities in the

stock market your pension fund does it

for you and believe me quite heavily so

so this is a take away for you tonight

if you're think you're not concerned by

the stock market actually you are three

things to notice on this chart financial

crises happen when the bars go down and

look at the numbers here they increase

financial crises get worse and worse

fact number two there's a recurrence in

these financial crisis it happens on

average every ten years now I'm not

saying it's going to happen every ten

years but there's a recurrence in

financial crisis but more importantly

there's almost always a feeling of deja

vue when we get into a financial crisis

and you want to know why because since

1472 1472 financial crisis almost always

occur for the same reason 1472

ring a bell to anyone

1472 was the year the first bank ever

who was created not here in Switzerland

as some private bankers would claim in

Italy in Tuscany Lamont de passkey

de siena 1472 and what is the single

mistake which we have been doing mistake

not mistakes mistake that's the one

excessive debt be it in the government

sector in the corporate sector or in the

household sector there's almost always a

problem with too much debt in the system

now how can we avoid the next financial

crisis we need somebody to tell us

there's too much debt in the system this

could be this man here now who is this

man this is dr. Alan Greenspan and for

20 years he was at the helm of the most

powerful institution that impacts

financial markets the US central bank

the Federal Reserve and look here what

this man says him and then his successor

because he's no longer chairman of the

Fed he says you can only detect a bubble

when it bursts with that you understand

why we get financial crisis sits 1472

because nobody acts before they come now

we need to define what the bubble here

is let's talk about bubbles sparkling

wine or champagne can you tell which is


okay so now when I show these slides to

my students I tell them the following

imagine that sparkling wine is

government bonds and champagne is the

stock market government bonds is a bit

of a boring investment give some money

to the government and in exchange they

give you an annual income a coupon and

in the end eventually at maturity if

everything goes well you get your money

back the equities is more for the kind

of people who are looking for growth of

your capital right but it's much more

volatile okay that's champagne just

think of that government bonds sparkling


champagne equities now imagine the

following after this talk you're invited

to a party to have a friend of a friend

and he tells you bring a bottle with

bubbles and you have the choice of

buying sparkling wine at $20 a bottle or

champagne at $40 a bottle when I showed

this slide to my students what they

usually say ah I'm a bit short of cash

right now so I go for the sparkling wine

you know a bit dark it'd be late at

evening nobody will notice I'd take the

sparkling wine okay now next question in

one year's time same type of same kind

of invitation also for a different

friend of a friend and here you're

confronted with the following choice the

price of champagne has tripled to a

hundred and twenty dollars the price of

sparkling wine has quintupled has gone

to a hundred dollars now what would you


show of hands who would buy champagne

quite a few them who would buy sparkling

wine fewer who would ban on now you're

talking this is very interesting because

this is precisely what I'm aiming at

with this example is to show that this

is a bubble we are buying today equities

not because they're cheap because we're

comparing them to something which is

outrageously expensive government bonds

and we say one hundred twenty dollars

for a bottle of champagne that's cheap

compared to a hundred dollar for

sparkling wine but I tell you what when

you see these kind of prices just

imagine one thing just imagine I add a

zero to both numbers would you buy

champagne at $1,200 just because

sparkling wine is at $1,000

so there you go this is a bubble this is

when you get a bubble and it pricks it

bursts and you get a recession is when

prices are insane and when you look at

these prices you feel like laughing and

just say ha

you must be kidding for that kind of

prices I bring a bottle of sparkling

water to the party okay so dr. Greenspan

and his successor are telling us we

cannot know ahead of the bubble if

champagne at $120 is too expensive or


hence we don't do anything but when we

get the financial crisis that's when we

come in play that's when we get into

action then you know what we get a

problem and that's the problem here

illustrated I say what is this a central

bank can bring the donkey to the

fountain but it cannot make him drink

this allegory fantastic allegory was

given to me by Professor jean-pierre Don

teen who taught economics at Universal

Design before he became vice chairman of

the Swiss National Bank and he tell me

Michele remember a central bank can

bring the donkey to the fountain but it

cannot make him drink actually this is

the French version in English it's you

can lead a horse to water but you cannot

make him drink no matter how hard you

try to show him how to do it now what do

we mean by that what we mean is the

central bank once we get into a

financial crisis they open the liquidity

tab and they tell the horses come and

drink my water whose other horses the

commercial banks they take they must

take all that liquidity from the central

bank and inject it into the real economy

to make the economy grow again out of

the recession okay but it's central

banks do that they are praying for

commercial banks to follow their advice

but if commercial banks they don't

want to play the credit game the economy

goes nowhere and we get this Japan is

the textbook case for a total disconnect

between monetary policy and the real

economy there's no guarantee whatsoever

that the current policies of the central

banks injecting liquidity after the

financial crisis is going to work

because it depends on what commercial

banks are going to do Japanese horses

have not been thirsty for the last

thirty years why because they drank too

much water before the financial crisis

they were providing loans to whoever

asked for them so they were full of

non-performing loans in their balance

sheets so when the central bank comes

and injects that liquidity the liquidity

you know what it does instead of going

into the real economy

it goes into financial markets the banks

in Japan they were buying government

bonds instead of providing loans to the

real economy the Americans have found a

way to force the horses to drink yeah

it's true

it's called tart tarp is trouble Asset

Relief Program this was implemented

right after the last crisis we had in

2008 what you do is you go to the banks

and you tell them show us all your bad

assets all your non-performing loans

which is a polite way of saying these

loans will never be paid back

non-performing loans show us then you

take them all and you dump them in a bad

Bank is that the policy would that be

just the solution to just take all the

dirt and dump it somewhere of course it

worked when you inject monetary policy

we inject liquidity there after then

banks played the credit game and the

economy grew it did grow faster in the

u.s. than in Europe and all over

emerging countries but that's clearly

not the solution where it'd be that easy

you know

we would know rather than just doing

such extreme solutions I

believe it's much better to try and

identify speculative bubble before they

come and here is one indicator I look at

when you want to assess whether debt is

too high instead of asking yourself is

it excessive or not what you do is you

ask yourself is it sustainable look here

this shows the evolution of the US

household debt in relation to GDP is it

a good indicator of the recessions which

are indicated by these vertical bars no

but if you look at this line here it's

the debt cost can we afford for this

debt can we pay for it then it's a much

better indicator look here if the debt

cost is 6 percent or more of GDP then we

get into a recession

the indicator works pretty well another

indicator I'm looking for is global

inflation what I look for global

inflation the problem we have today is

that central banks are looking into the

basket of consumer goods to find for

inflation there's none there there's

hardly any inflation in the consumer

basket but there's a lot of inflation in

the financial assets and central banks

need to include those financial assets

into their measure of inflation and this

is what I do here and you get these bars

when they go down you get a stock market

crash in the US and financial crisis and

what I've noticed is that whenever that

global inflation measure exceeds 4

percent boom soon after we get a

financial crisis these are some examples

of things you can do to identify the

bubbles before they explode I believe

it's really relatively easy to make the

horses drink for that to happen you just

have to make sure they don't drink too

much before we get into a financial

crisis you have to make sure that

commercial banks are not providing too

many loans to the households to the

corporates to the government's for

buying champagne or whatever price for

doing crazy and wild things this is what

you need to do just restrict credit when

you think it's becoming excessive

and that's the best way to ensure that

we avoid the next financial crisis

avoiding the next financial crisis is

like fighting global warming it's not

because we don't know exactly by how

many degrees the temperature on this

earth is going to increase over the next

50 years that we should stand there and

do nothing