Ultra-low interest rates put in place during the global financial crisis have the potential to fuel excessive economic activity and eventual bust, particularly in Asia, according to a former top US bank regulator.
But Eugene Ludwig, who was Comptroller of the Currency during the Clinton Administration, said he was hopeful the world’s central banks would be able to quickly rebalance monetary policy, as the Reserve Bank of Australia (RBA) had started to do, before problems emerged.
Overregulation in individual countries, which could hamper the flow of cash between nations, was another potential risk that could create an aftershock in a post-global financial crisis world, Mr Ludwig said in an interview on Wednesday.
“One (risk) is the excessive liquidity that exists in the world at the moment and the potential that the rebalancing by the central banks won’t be quick enough,” said Mr Ludwig, who was in Sydney to open the local office of his consultancy, Promontory Financial Group.
“You saw what the central bank of Australia did, heading in that direction, so I have a lot of respect for that.”
As part of a global response to the financial crisis, central banks in the US, Europe, the UK and Japan – encompassing the world’s biggest stgeloped economies – cut benchmark rates to between zero and one per cent.
The RBA slashed its cash interest rate to a 49-year low of three per cent.
The RBA this week became one of the first central banks to start the process of lifting rates to more normal levels, after increasing the cash rate by 25 basis points to 3.25 per cent on Tuesday.
Low interest rates make it easier for consumers and companies to borrow money, which can encourage asset bubbles to form.
And that was one of the factors driving the recent financial crisis, according to Mr Ludwig, who said the US central bank, the US Federal Reserve, had maintained a low base rate for too long after the dotcom share crash in 2000, encouraging excessive borrowing for housing in the intervening years.
There was now a risk that economies in the Asia region could also overheat, Mr Ludwig said.
“We’re getting some pretty steep growth rates stgeloping in Asia and whenever you see excessive growth you’ve got to put question marks over it,” he said.
“If the current difficult picture in the stgeloped world continued, and you got a little bit of a bust in Asia, commodity prices would drop significantly, and that puts the Australian economy at risk.”
The other, equally dangerous risk to the world economy could came from individual countries enacting excessive and uncoordinated financial regulation, Mr Ludwig said.