Paul Tucker: National balance sheets and macro policy: lessons from the past Speech by Mr Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, at the Society of Business Economists’ Annual Dinner, London, 28 February 2012. *  *  *  The spectre hanging over the world economy these past years – the drag on our recovery – has been deleveraging. Around the world, households, some firms, banks, governments, whole economies are acting to reduce their debt overhang. By selling assets, cutting spending, deferring investment. What gets delevered – as the ugly phrase goes – is a balance sheet. Balance sheets became stretched. Sectorally. Nationally. Through much of the industrialised West. The idea of over-borrowing, of overstretched balance sheets, is hardly novel. Economists are taught about the importance of stocks of debt; about “budget constraints”, beyond which a borrower’s expected future income, their wealth, is insufficient to service and repay their accumulated debts. But, by and large, economic commentary focuses on flows – the path of output, consumption, and investment and the current account balance. I exaggerate, of course – not least because cumulative flows create stocks. Nevertheless, it is salutary to remind ourselves that less than a decade before our crisis broke, we – the West – had been preaching to emerging market economies (EMEs) the necessity of monitoring, and even managing, the national balance sheet. That was in the wake of the Asian and Latin American financial crises of the 1990s.
In fact findings show that the implications of this in the long term for the ability of households and businesses to get a loan are relatively modest – although there is considerable uncertainty around this result. As such, while other risks may arise during a transitionary phase, the most significant risk arises from the potential for stablecoins in particular to undermine confidence in money and payments, and hence in the wider financial system. As we discussed a few minutes ago, the risk of a loss of confidence in the credibility and stability of private money is not theoretical. Loss of confidence in private money can be a major threat to financial stability. But it is equally true that private money can be made acceptable as a widespread means of payment – indeed, as I covered earlier, the vast majority of money held for transactions in the United Kingdom is already private. So, with the right regulation, a stablecoin could potentially be made safe for wide-scale use. Our existing regulatory framework seeks to ensure that the public is able to trust the reliability and stability of the money it uses every day. Banks are subject to extensive rules and requirements to ensure that consumers can use privately-issued money with confidence and interchangeably with cash. These core rules and requirements were developed over time – in many cases via trial and error, with new rules introduced following financial crises.