BIS: Long-term Sustainability vs. Short-term Stimulus

This one appears to be very important in the context of current financial and economic mess. The speech by Herve Hannoun, the Acting General Manager of the Bank for International Settlements (BIS), is a good reminder. Here is the full transcript (HT Alea), but here is the conclusion by Hannoun for lazy folks:

Policymakers may be taking actions that will slow, or possibly prevent, necessary adjustments. Most informed observers agree that the capital structures of the US and European economies need to change. That is, there is too much debt relative to equity. What has been commonly called “deleveraging” is the process of converting debt into equity. Some of the economies that are in trouble clearly also need to make big adjustments in their industrial structure. For one example, the global financial system is almost surely too big. And in some countries the residential construction industry is unsustainably large. The point is that fiscal policymakers must take care that their expansionary policies do not simply delay needed adjustments. If there is such a delay, we could be in for a very long haul.
It is a legitimate goal of policy to mitigate the macroeconomic recession and slow the spin of the negative feedback loop. However, expansionary policies that fail to take the crisis of confidence sufficiently into account run the risk of becoming ineffective beyond the very short term. To restore confidence in a sustainable way, policy actions should be embedded in a credible longer-term perspective and pay due attention to their effects on the expectations of economic agents.
Policymakers have therefore to be aware of the risk of providing “too much” demand stimulus and should not exclusively focus their attention on the risk of “not doing enough”.
The crucial actions are to develop consistent medium-term policy frameworks (and, in particular, preserve fiscal discipline), plan sufficiently in advance for how current policies will be unwound when normal conditions return, and develop a consistent approach to macrofinancial stability. Together, these measures would ensure that short-term policy actions do not sow the seeds of tomorrow’s boom and bust episodes.