–Adv Econs Must Use Lessons From Crisis To ‘Vaccinate Ourselves’

By Chris Cermak and Brai Odion-Esene

WASHINGTON (MNI) – Former European Central Bank President
Jean-Claude Trichet said the ECB’s recent LTROs were “fully justified”
but stressed certain conditions would have to be met by the financial
system and the governments to ensure their success.

Trichet also urged advanced economies to use the lessons learned in
the current crisis to “vaccinate” their economies against future
troubles.

Trichet stressed the ECB should ensure commercial banks do not take
advantage of the easy provision of liquidity and continue to address the
need for deleveraging despite the ECB’s three-year LTROs.

“The measure that has been taken recently was in my opinion fully
justified because we had to cope with a very very grave and immediate
threat of major disruption of our market,” Trichet said at a Federal
Reserve conference of central bankers in Washington.

But he added: “You also have to care for nobody to take advantage
of this situation.”

That same message should be sent to governments, Trichet said, “not
to take unfair advantage of the fact that the central bank has engaged
in non-standard measures” to relax their fiscal commitments.

Another condition of the ECB’s provision of lilquidity should be
the “improvement of governance” in the Eurozone: “That is of course
absolutely essential.”

Trichet warned finance ministers around the world not to take the
actions of central banks globally as a reason to believe the crisis has
passed. He urged groups like the G20 to “do the job and not to think
that because of the central banks’ forth-comingness, there is no
crisis.”

“I believe that we are all still in a crisis,” not just in Europe,
Trichet said, and that advanced economies are experiencing big
structural adaptations.

“We are experiencing a structural adaptation of the global economy
over the last 35 years with the various continents being targeted by the
structural adaptation processes successively,” he said.

Other continents underwent the process early, he continued, meaning
emerging economies were “remarkbaly resilient” given current conditions
in the global economy, meaning “they drew on the lessons of their own
experience and had a kind of vaccine that had functioned.”

This would suggest that advanced economies must learn all the
lessons from the recent crisis.

“It is a unique opportunity to be sure that we vaccinate ourselves
in a right and proper fashion,” Trichet said.

He noted that the advanced economies that have been insulated from
the current turbulence sparked by the Eurozone debt crisis, are Canada,
Scandinavian nations and Germany.

Canada had “enormous problems” at the end of the 80s, he said, but
used the lessons from that period, as did Sweden and other Nordic
nations during their crisis at the beginning of the nineties.

Now, “they are very well protected in the present circumstances,”
Trichet said.

As for Germany, the European giant had to deal with reunification
in 1989 — again an “enormous challenge,” Trichet said — implemented a
lot powerful adjustments over the last 30 years “and of course is in a
situation which everybody knows is better than many others.”

“We have all the proof that this opportunity which is open to us
has to be fully utilized,” Trichet said.

Looking to the future, Trichet said he feared the global financial
system may have entered a “new world” in which the kinds of non-standard
measures taken by central banks since the collapse of Lehman Brothers
could become permanent, because the new interconnectedness meant shocks
to the system could occur in a matter of days.

Central banks reacted after Lehman because of the “systemic tail
risk with an immediate threat of dislocation of the market…but then
perhaps you continue to step in because it is the way the system
functions,” Trichet said.

“That would be a kind of permanent regime,” Trichet said. He hoped
such “conjecture” would be proven “absolutely wrong” and also painted a
more “optimistic” scenario in which central banks would slowly be able
to unwind their extraordinary measures and reduce balance sheets over
time.

Still, Trichet pointed to the length of the extraordinary measures
to date, noting that “nobody would have expected that after such a long
time after Lehman Brothers, we would continue to have this expansion of
our balance sheet and non-standard measures,” he said.

** MNI Washington Bureau: 202-371-2121 **

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