The seeds of the next global financial crisis have been sown and could blossom if governments are unprepared, according to a new report from free market think tank the New Zealand Initiative.
Titled “Walking the Path to the Next Global Financial Crisis”, the report says measures taken by countries, including New Zealand, to counter the economic impact of Covid-19 have masked and in some cases exacerbated the risks.
“The Covid-19 financial relief package has kept Kiwis out of the benefit queue and saved many businesses from bankruptcy,” said report co-author Bryce Wilkinson.
“However, the government should pay off these debts quickly in order to prepare for the next financial shock. Failure to prepare now for the next financial crisis could destroy New Zealanders’ nest egg and threaten their livelihoods.”
He said governments had spent money they didn’t have to spend and central banks had acted like “bottomless ATMs”.
A common approach around the world has been for governments to roll out costly support programs for households and businesses, to borrow heavily, while central banks have eased policy and printed money, driving down interest rates. interest and fueling house and stock prices and inflation.
However, the report says policymakers would find it difficult to unwind the “extreme” measures, and there could be disastrous consequences such as increased unemployment, business bankruptcies and the destruction of nest egg and savings. livelihoods of New Zealanders.
A former Reserve Bank chairman, Arthur Grimes, echoed the concerns in a foreword to the report.
“Central bank actions during the pandemic … have exposed New Zealand to increased risk of asset price collapses with ensuing economic hardship; the risk is heightened by unsustainable fiscal and monetary policies at worldwide.”
In an online discussion of the report, former Prime Minister Sir John Key refrained from predicting another GFC, but said high public debt could be a factor in another crisis, and that this forced the government to be careful about spending and borrowing.
“The simple reality is that they lay out the ingredients for what could be a very dark time in our economic future if we are not careful. [or not] fortunate.”