Seeking A More Stable World Economy

Alberto Bisin, professor of economics at New York University and fellow at the Econometric Society, studies social, financial and behavioral economics, regulation and income distribution. He spoke with Global Finance on Brexit and other global risks.

Global Finance: What keeps you up at night—from a macroeconomic perspective?

Alberto Bisin: The possibility that the UK will opt out of the European Union, which may trigger more EU member states to get out as well. It is a big risk and something that the global economic system has not had to face before. The European Union lacks the flexibility to deal with this, because it’s a possibility that was not foreseen when the Union was created. It may have very deep implications, mainly for European assets.

GF: What are other big risks?

Bisin: There is a need to reinvent financial regulations and institutions in the US and in Europe. A big, ongoing discussion is about how to reform financial markets. This discussion is often ideologically charged. The term TBTF [too big to fail] is a trivialization of a very important issue. There is a moral hazard issue in managing big banks. If big banks are backed by government money, they do not have the right incentives to avoid too risky assets.

GF: So do you favor more direct regulation of large banks?

Bisin: Credit supply depends on the banking network, and in periods of crisis, such as the mortgage crisis in the US or the banking crisis now in Europe, credit supply declines dramatically. In these situations, public intervention is very much needed. But this means that banks have no incentive to be safe, which does not imply we must break up the big banks. It means that there is a problem of moral hazard, which should be addressed. In a sense the problem is similar to one authorities had when central banks were printing money to fund public deficits. This was solved by giving banks political independence. We face a similar dilemma, and we need to find a similar solution.

GF: There was a big debate at the IMF in April over negative interest rates. What’s your view?

Bisin: In the short run, negative rates spur economic activity, and, as such, they are a good thing. In the long run, however, you need incentives for people to save, and negative rates do the opposite. Today there is an abundance of liquidity, so negative rates are not a big problem. But in the long run, they can be. Central banks have done a lot to support growth, and there’s not much else they can do at this point.

GF: What about their impact on emerging economies?

Bisin: There’s little that central banks can do in emerging markets. People take money out of these countries for many reasons unrelated to interest rate differentials. They need to develop their own financial markets. In China an interesting experiment along those lines is under way.

GF: What do you think of Basel III and bail-in regulations?

Bisin: In the short run, they can create problems; but in the end, they’ll provide more stability and be a good thing.