Two former finance leaders on Sept. 27 painted a glumpicture of the global economy as loose monetary policy has lost its efficacywhile uncertainty has increased from both Brexit and impending reform in China.
Former Treasury Secretary Hank Paulson said negativeinterest rates do not appear to be boosting the economy. And after years ofultra-low interest rates, central banks across the world need to figure out howto normalize their policies.
"Whether I'm looking at Europe, the U.S., Japan, China,Russia, whatever, economic policies that used to work aren't working. And thegovernment, no matter what the form of government is, they are having troublemaking these big, difficult, controversial structural changes," Paulsonsaid.
Former U.K. Chancellor of the Exchequer George Osborneoffered a similar assessment, saying ultra-loose economic policy has beencrucial to supporting the global economy but has made the "richricher." As an ameliorative step, Osborne said the U.K. raised the minimumwage, a move that the U.S. should consider.
Paulson also said ultra-low interest rates has worsenedincome inequality and has distorted capital markets. He said it creates assetbubbles by forcing investors to seek out returns and misprice risk.
"There is no doubt that it is increasing risk, and itis hard to find where those risks are," Paulson said.
The former finance chiefs spoke at the annual meeting of theSecurities Industry and Financial Markets Association in Washington, D.C., whichcovered a wide range of topics affecting the global economy. Osborne spent sometime discussing Brexit, saying the U.K. economy has already been affected bythe vote, pointing to devaluation of the sterling and a downgrade of economicgrowth forecasts for next year, generally cut to 1% annual growth from previousforecasts of 2% growth.
But Osborne said it was possible the U.K. could retain manyof its financial relationships with neighboring nations by opting for a"soft Brexit" instead of "hard Brexit," which would severall trading ties.
"There will be those who want the absolute, purestposition and take no logic to the point where we have no particularrelationship with our European neighbors. I think that would be a huge mistake.It would not be just a mistake for Britain, it would be a profound mistake forEurope, and I also think it's a mistake for the U.S. I think there is anenormous U.S. interest in a strong, stable and prosperous Europeancontinent," he said.
On Brexit, Paulson said "there is no doubt" thatit will slow growth in the near term by introducing uncertainty to anyfinancial relationships with the United Kingdom.
Paulson and Osborne also spent some time discussing China.Both speakers said the nation needs to reform its economy, which is dominatedby state-owned oligopolies. The nation will have a party congress in 2017 thattakes place behind closed doors but could kickstart reform efforts.
"If you want to be an optimist, you'd say that thepresident's … focus is on political consolidation, getting more reformers inkey positions so he can get some of these more difficult things done,"Paulson said. "If you want to be a pessimist, you'd say, 'Boy, this debtis still rising and the longer you wait the more difficult it is to get thesereforms done.'"
Osborne said China has massive overcapacity in the steelindustry, which will require difficult decisions to shutter factories,triggering job losses. He said Western politicians should try to encourageChina to enter certain institutions, such as the International Monetary Fund,as more vigorous participants.