Masaaki Shirakawa is the former governor of the Bank of Japan.
It may be too early to talk about the world after the pandemic, but I believe it is worthwhile. After all, the monetary easing which developed economies adopted at the time of the global financial crisis, or GFC, in 2008-09 is still with us.
For this, I would like to do two exercises. One is to look at financial imbalances before the outbreak of the coronavirus to see if they can tell us what is coming next. The other is to reflect on the direct implications of the pandemic for globalization, one of the drivers of growth since the fall of the Berlin Wall in 1989.
Various forms of financial imbalances had already accumulated. For example, the elevated level of public and private debt has been a popular topic in policy debates. Huge increases in investment funds, which can be redeemed at short notice, gave rise to liquidity risk, which has been well recognized.
We had severe market turbulence in March, though somewhat improved recently. Stock price declines mainly reflect underlying concerns about the potential damage and uncertainties caused by the coronavirus pandemic.
What characterizes a financial crisis is a negative feedback loop between the real economy and the financial system. At present, the real economy causes trouble in the financial market, not the other way around. But now that many economists project a sharp contraction in economic activity, it is hard to believe a complete decoupling between the real economy and the financial system will continue.
People who are sanguine about the health of the financial system point to the ampleness of banks' capital and liquidity buffers after post-GFC financial reform. These efforts are commendable, but I am not fully convinced by this argument.
The most salient feature of market turbulence in March was a flight to liquidity. It was telling that this phenomenon did happen, despite central banks' balance sheets having expanded enormously, with abundant cash liquidity.
Yes, banks' regulatory capital was sufficient. But this depends on how banks perceive and calculate risk by their own internal risk model. A simple leverage ratio which does not rely on sophisticated risk measurement paints a different picture for large U.S. banks. We have to be alert to potential vulnerabilities.
My second exercise is about the impact of coronavirus outbreak on globalization, without which the global growth rate would have been much lower.
In the past 10 years or so, we have observed some reversal or backlash. It started with anger at the global financial trade symbolized by the collapse of investment bank Lehman Brothers. The growth of cross-border lending has slowed. Subtle financial regulations with the effect of ringfencing domestic interests are now not rare.
Discontent with globalization spread to the movement of people, best represented by the Middle Eastern refugee crisis and Brexit. It further spread to the international trade of goods and services -- witness the trade dispute between the U.S. and China. Enhanced data protection is taking on an element of a subtle form of retreat from the conventional notion of globalization.
The coronavirus pandemic will surely affect global businesses' decisions on supply chains as well as ordinary citizens' decisions on foreign tourism. Given a growing sense of inequality of income and wealth that is also related to globalization, it seems inevitable that average citizens will become cautious about embracing hyper-globalization.
The issue is not solely about xenophobia. For example, the EU announced restrictions on the export of medical gear. The difficulty of reaching agreement about coronabonds, bonds issued by the whole EU to raise money for the crisis, was another example.
After the outbreak of coronavirus, some retreat of globalization seems inevitable. My concern is if such movement goes too far. I suspect that if the globalization trend should really be reversed, people would then start complaining about a resulting decline in living standards.
The world after the pandemic depends on policy responses as well. What central banks could best contribute now is to maintain functioning markets. In this regard, the enhanced U.S. dollar swap line between the Federal Reserve and major central banks should be highly valued.
Monetary easing is not an answer in a situation where face-to-face contact should be restrained. In any event, now the policy rates of central banks in all developed economies have become practically zero. This zero-interest rate world is troubling because the economy and financial system are potentially vulnerable thanks to excessive debt and a lack of monetary policy space.
This odd situation is the cumulative result of justifiable central bank action on a stand-alone basis. Thus we have to reconsider the basic framework of monetary policy itself. Meanwhile, fiscal policy measures aiming at relieving uncertainties facing individuals and small businesses are needed. But cries of a "wartime economy" make me feel a bit uneasy.
As for globalization, governments and central banks should make the utmost effort to avoid the retreat of global cooperation.