Lessons not learned and Depression could be in the offing: economist

TIM PALMER: A top economist is warning that the world has failed to learn the lessons of the global financial crisis and that the next downturn is likely to spark a Depression.

The global strategist at Morgan Stanley, Gerard Minack, says history is repeating itself as central banks keep interest rates close to zero and ramp up quantitative easing - effectively the printing of money.

But Mr Minack - who was one of the few economists to predict the last financial crisis - says the loose monetary policy is only increasing debt levels and the risks that investors are prepared to take.

Gerard Minack is speaking with our business editor Peter Ryan.

PETER RYAN: Gerard Minack, are we at the point in the economic recovery where there is a risk that history might be repeating itself?

GERARD MINACK: Yes, I think history is repeating itself in a funny way. We're doing it all again. But I think the next downturn, whenever it comes, and I'm not saying it's this year, it could be exceptionally difficult because central banks simply have less firepower to respond to a renewed crisis.

PETER RYAN: So if there is another serious downturn in the proportion of another Lehman Brothers collapse, central banks would be left with little ammunition?

GERARD MINACK: Yes, that's my view. The only thing I'd say is what history suggests is the cause of one crisis is rarely the cause of the following crisis so I'm not so sure it will be banks that pop the bubble. I'd look at other things - perhaps low-grade corporate lending or even some of the emerging market economies. They could be the catalyst for the next downturn but the underlying causes will be very similar.

PETER RYAN: So in terms of the massive or continual quantitative easing or money printing that we've been seeing over the last several years, that just would not be possible in a new type of crisis?

GERARD MINACK: They could try to do that and in fact they probably would. The problem is what they've been able to engineer over the last three or four years is interest rates going to rock bottom low levels and of course there is a limit to how low you can push rates and that's about zero.

So the forward looking problem is how do you engineer another reduction in borrowing costs if borrowers get into trouble? And that's the sting the in the tale of the success so to speak of what central bankers are now trying to achieve.

PETER RYAN: Is there a risk that when interest rates start moving higher in the United States for example that borrowers might find themselves under the pressure that they saw in the lead-up to the sub-prime crisis?

GERARD MINACK: I think that's a risk for sure but we've got a group of central bankers now who have told us they will "do what it takes," quote, unquote, to keep this expansion going.

So we're really looking at I think the end game here not being central banks tightening and killing the expansion but a bubble inflating in some risky assets and that bubble popping. Not this year as I said, perhaps a couple of years away.

PETER RYAN: So given that the world averted a full on meltdown after the collapse of Lehman Brothers, is there a point where the music would actually stop in the event of a different scale or a new crisis?

GERARD MINACK: Well that is the really big risk. We've really now seen 30 years where debt has ratcheted higher every cycle. As a result interest rates have ratcheted lower. We've never had the sort of cleansing, the outright debt reduction that you'd think you'd need to put expansion on a sustainable basis.

The scary point is those big debt reductions tend to go hand in hand not with vanilla recessions but with deep crises or depression. We saw that in the 1930s, we saw that in Asia in the crisis of 97/ 98.

Policy makers by having averted this time that big debt reduction may just be storing up even more problems down the track. We've really just kicked a massive can down the road.