CENTRAL BANKS HAVE VERY LIMITED AMMUNITION
Her comments followed UBS CEO, Sergio Ermotti, saying that he hoped “we don’t rely on central banks to resolve the issues,” in the wake of another crash. He suggested that some central banks have “very limited ammunition,” while others perhaps had a bit more flexibility.
Lagarde concurred that,
It would be very nice if the economies at large didn’t have to rely on the central banks yet again in order to resist the next shock.
She singled out Mark Carney of the Bank of England, and Jay Powell of the Federal Reserve, as two of the very few central bankers who have a little bit of space to maneuver in the wake of the next downturn.
COMPLETE REFORMS WHILE THE GOING IS GOOD
Both Lagarde and Ermotti suggested that it was important to complete reforms while the economic environment is good. Central Banks took unprecedented measures to stimulate lending and economic growth after the 2008 crash (by printing a record amount of money).
However, a belief that this fallback will always be there, can lead to complacency, meaning critical reforms are never implemented.
Ermotti said that countries must “take the bitter medicine” and implement changes that would benefit their citizens. Lagarde urged policymakers to “take the right course of action” on reforms. Although work had begun, this in some cases barely scratched the surface. It is essential to complete these critical reforms and that they go deep enough.
FINTECH IS GOING TO SHAKE THE SYSTEM
Lagarde concluded by saying that banks needed “purpose” beyond just the single-minded pursuit of profit. She warned against complacency regarding fintech, which includes virtual currencies and bitcoin, that she said would “shake the system.”
Repeating her view that a regulated fintech with AML measures and consumer protections was a positive force, she continued to say that many large banks realized this, and were either incorporating fintech companies or moving in the same direction themselves.
Of course, Bitcoin didn’t exist at the time of the last financial crisis. In fact, it was ‘spawned’ as a direct response to it, according to ECB Executive Board member Benoît Cœuré.
Meanwhile, adoption is always accelerated by national economic failures and unrest. The next global financial crash could provide a key momentum swing, leading to the eventual collapse of banks that have indeed become complacent with their monopoly over money creation.