Lessons from the credit crunch : The Economist

[JR_Handsome]

Lessons from the credit crunch

Oct 18th 2007
From The Economist print edition


Central banks have worked miracles for 30 years. Don't count on that continuing








AFTER a sudden market panic, all is well. Prices dropped precipitately, but investors have come to see that the Federal Reserve, under its new chairman, will not let the economy slide. Normality has been restored.

That was 20 years ago. Black Monday, October 19th 1987, was the day stockmarkets plunged; and Alan Greenspan, who won his central-banking spurs in that crisis, was the Fed chairman (see article). Two decades on, in the wake of this summer's subprime squeeze, stockmarkets are showing similar faith in Ben Bernanke, Mr Greenspan's successor. Despite bad news from the housing market and warnings from the treasury secretary, America's equity markets are still higher than they were in May. Amazingly, investors have been buying both on good news (don't worry, the economy is fine) and on bad (don't worry, the Fed will come to the rescue by cutting rates).

But the parallel with Black Monday does not work as well as investors might hope, for two reasons. First, this financial crisis is centred on the debt markets, not equities. Debt is more dangerous and in its current securitised form much harder to isolate. Interestingly, the money markets seem more worried about how the credit crunch may end than equity investors are. Interbank rates, though they have eased, are still high: not knowing which institutions might be on the hook for subprime losses and spooked by their own exposures, banks remain wary of lending to one another. And the repricing of mortgage-backed securities looks likely to be a protracted business. The news that big American banks, prodded by the Treasury, plan to set up a super-conduit in which to park instruments once valued at dozens of billions of dollars is a sign of how gummed up that market still is.

The more important flaw in the parallel concerns the role of central banks. The Fed emerged from the crisis 20 years ago with its reputation not just unscathed but also enhanced. This time round, the central banks' faults are painfully visible.



Dodgy dentists
Since the 1970s, the central banks' record has been remarkable. A generation ago, inflation around the world was high and variable. Now, by and large, it is low and stable. That has helped to foster steady growth. Central banks have done more than enough to justify the argument that monetary policy should be run by technicians rather than by elected politiciansan astonishing achievement in a democratic age. And technicians is the right word: central banking has become an increasingly technical business, performed by leading monetary economists equipped with ever more sophisticated theories and statistical techniques. Granted, there is still a lot of art amid all the science, but if any economists have become the dentists that John Maynard Keynes thought they should aspire to be, it is those in central banks.

Nevertheless, as our special report in this issue argues, the past couple of months have demonstrated the limitations of central bankers and financial supervisors (they are not always under the same roof). This is so in at least three respects: monetary policy, economic modelling and bank supervision.

Loose monetary policy is partly responsible for the mess the central bankers are now trying to clear up. Other factors contributed to the crunch, including rash lending, securitisation and globalisation: when American subprime loans went bad, banks in Leipzig (which had bought the stuff) and in Newcastle upon Tyne (which hadn'tsee article) were caught out. But whichever way you look at it, central banks kept interest rates too low for too long. That is most true of the Fed, which slashed rates between 2001 and 2003, held them at 1% for a year and then raised them in slow, predictable quarter-point steps, fuelling the housing boom. The results of that are plain to subprime borrowers facing the loss of their homes and to investors who ended up with subprime debt.

The other two limitations are both related to central banks' and supervisors' ability to control a much-changed financial system. One has to do with asset-price bubbles. The macroeconomic models used by many central banks focus on short-term influences on inflation; they focus less on the supply of money and credit. Even when they do have the right tools, central banks have preferred to wait till bubbles have burst, before mopping up afterwards by cutting rates. The snag is that this can start off new bubbles (as it did after the dotcom bust).



Credit where it is due
The last restriction has to do with supervision. Central bankers certainly gave warning that financial risks were being underpriced; contrary to some of their critics, they also had an eye on the off-balance-sheet entities in which banks parked their subprime assets. But they did not appreciate what the impact on the banks would be if those risky assets suddenly lost value. Like most of the people they regulated, the central bankers did not factor in the full effects of a liquidity squeeze.

In one way addressing these shortcomings is simply a matter of learning from experience. If monetary policy was too loose, very well: central bankers will have the chance not to repeat their mistakes. Fortunately inflation, as conventionally measured, has not taken off: that inflation expectations have remained low is a sign that markets and the public still believe central banks can keep prices stable. That may become more difficult, if, say, China is truly turning into a source of inflationary rather than disinflationary pressure. But it can be done.

Central banks should also think harder about what can be done to head off asset-price and credit booms before they turn into damaging and dislocating busts. One answer would be to consider extending the definition of inflation they already aim at to include property and shares. Alternativelyand perhaps more feasiblythey should be more willing to raise interest rates when credit growth is strong or asset prices are booming, even if consumer-price inflation is under control.

Supervision is hardernot least because over-regulation is a danger. Despite the howls from politicians, securitisation has been a boon for the world economy. That said, central banks and supervisors surely need more information not only about what banks have on their books, but also about what they may have to stump up for if liquidity dries up. One focus should be accounting: remarkably, pricing some instruments is so complicated that banks on both sides of an intricate trade have reported profits. The new Basel 2 banking regulations will force banks to recognise liabilities that until now they have been able to hide. But the Basel rules set too much store on the setting aside of capital; at times like these, what banks need is liquidity (which Basel puts less stress on).

No doubt central bankers will work at these shortcomings. But consider a paradox: the credit crunch has been caused by their successes as much as their failures. Low, stable inflation and strong, steady growth created an incentive for investors to go hunting for risk. The returns were tempting and with wise central bankers in charge, who could lose? Too many investors and bankers have outsourced risk measurement to the likes of Mr Greenspan and Mr Bernanke. Given the complexity of their job, that was truly irrational exuberance. If there is one lesson everybody should take away from the credit crunch it is that central bankers, no less than dentists, are only human.





Copyright © 2007 The Economist Newspaper and The Economist Group. All rights reserved.

[hongvalue]

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[cryptonian_man]

คุณ jr handsome ใช่คนเดียวที่ดังๆ ในพันทิพ ปะครับ ว่ามีแฟนคลับ เรื่องใบ้หุ้นเด็ดน่ะครับ


เห็นบอกว่าเสียตังค์ด้วยปะ


หึหึ พอดีเพิ่งขาดทุนไปน่ะ ขอหุ้นเด็ดก่อนได้ปะ ถ้าได้กำไร เดี่ยวจะมาเลี้ยงข้าว


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[newbie_12]

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