Hyun Song Shin On What Central Banks Have Learned From The Crisis

Tracy Alloway (0:11)

Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:16)

And I'm Joe Weisenthal.

Tracy Alloway (0:19)

So Joe, one of the really interesting things about our current economic situation is that we basically have a recession that's been induced by policy, albeit not necessarily economic policy, but by policy in general.

Joe Weisenthal (0:37)

This fact makes understanding this moment in the economy very bizarre. It's not like anything that we've ever seen before, in part because of exactly what you just identified, which is that a lot of the slowdown that we've seen in economic activity was completely by design. And it's hard to think of any previous comparison that really works as an analogy.

Tracy Alloway (1:01)

Yeah, exactly.

So along with this policy-induced recession, we also have the fact that the economic contraction has been much, much stronger or starker than we've seen in recent years. I think plenty of people have pointed out at this point that it's probably the biggest stop to economic activity that we've seen either since World War II or the Great Depression, so eclipsing the great financial crisis of 2008

Joe Weisenthal (1:32)

Definitely. But the other thing that goes along with that, and I guess this is what we're going to talk about is because so much of the slowdown was by design, and obviously it wasn't all done by law. I mean, people naturally change their behavior in response to the virus, but so many policy changes were by design to slow the spread of the virus.

We also saw a sort of near real-time policy response to that because leaders or policymakers are sort of recognizing that they're going to tell people to stay home, they're going to tell people to not travel, and so forth. Then the economy automatically along with that needs a lot of support.

Tracy Alloway (2:13)

Right. Well, we can argue whether or not central banks were sort of the grownups in the policy room in this particular instance. But you're right. We are going to talk about the central bank policy response on this particular episode. And we have the perfect person to do it, someone who's been on Odd Lots before, actually the economic advisor and head of research over at the Bank for International Settlements, Hyun Song Shin.

Hyun, thank you so much for coming on again.

Hyun Song Shin (2:43)

It's good to be back.

Tracy Alloway (2:46)

So I should just mention that a lot of this conversation is pegged to the most recent report out of the BIS that really describes both the depth of the economic contraction that we've seen in recent months and also the policy response.

If you just sum up 2020 from a policy perspective, what has struck you the most? What stood out?

Hyun Song Shin (3:13)

Well, you know, it's a defining moment for the global economy, Tracy. I think we've never seen anything like it. It's three big shocks rolled into one. I mean, first of all, let's not forget, it's a health crisis. It is a pandemic.

And then, as you said, there was also the economic sudden stop. That was partly induced by the lockdowns, but also it also arises from the changes in the way that people behave.

And then, on top of all that, we have the acute form of a financial crisis back in March when the financial system basically froze up and the central banks had to really enter to try and unfreeze the financial system.

Joe Weisenthal (4:02)

So obviously, one of the advantages arguably that policymakers had going into this crisis was that in the last crisis, central bankers did a lot of innovation in terms of coming up with new policy tools to ease the strain on the financial system.

How much did that help them being able to build upon the work of what was done in 2008 and 2009? And what would you say were the key policy innovations this time around that are brand new tools in the toolkit that central bankers now can theoretically reach back towards if needed?

Hyun Song Shin (4:43)

Yeah, Joe, I think that's a very good question. I think one big difference between what happened this year and back in 2008 was, back in 2008, the banking sector, the financial system was the epicenter of the crisis. And then the real economy suffered the aftershocks of the contraction and the stress in the financial system.

I think what's different this time around is that the shock came from outside the financial system. And what that meant was that the remedial measures also had to be somewhat different. Now, I think the same set of tools that we used in 2008, again, proved very useful. And in fact, many of the liquidity facilities were already on the shelf, so you could just dust those off, and then we deploy them.