Imbalances in Household, Firm, Public and Foreign Sector Balance Sheets in the 2000s: A Case of “I Told You So”?

Abstract

In the mid-1990s, the International Monetary Fund promoted a new approach to country analyses that was better able to recognize the signs of impending financial crisis. However, the size of internationally exchanged assets and the links between resident and non-resident real and financial sectors increased considerably in the following decade, at a similar pace to (perceived) liquidity, making the effects of imbalances in the international economic system more difficult to control. The enormous increase in liquidity diverted attention from maturity mismatches, sewing the seeds of the 2008–09 “Great Recession”. In this chapter we consider whether a closer look at financial accounts statistics would have made it possible to anticipate the mounting turmoil. Our conclusion is that it would have helped only partially. The massive increase in international integration, which made it clear that any financial shocks would have global effects, and the strong reduction in household savings could have been anticipated. However, maturity mismatches and unsustainable prices of real and financial assets, two other major causes of the financial crisis, could not easily be seen from the financial accounts. It also emerges clearly that stock imbalances are less capable of signalling upcoming problems, while too rapid changes in financial positions provide stronger pointers and therefore need to be monitored closely. Indeed, a more careful scrutiny of financial accounts would have given at least some indication of the magnitude of the dangers ahead.

We are grateful to Riccardo De Bonis for useful comments on a previous version. The views expressed are those of the authors and do not necessarily reflect the position of the Bank of Italy or of the Eurosystem.