Thursday, Dec 13, 2007
Central Bank to the Rescue, views coming in
FT: Central bankers “feeling their way in the dark”
"The Fed stoked volatility by disappointing hopes of a big cut in the discount rate on Tuesday. ... So Tuesday’s savage Wall Street sell-off could have been avoided."
"They may well get the markets back into order. They may, in this way, rescue economies from the threat of recessions. But that is not the end of the story. The bigger the rescue has to be today, the more stringent regulation of financial institutons will have to be in future."
Posted by happyrenterz @ 09:42 AM (561 views) Add Comment
6 Comments
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1. happyrenterz said...
Nouriel Roubini is not impressed by Central Bank actions: http://www.rgemonitor.com/blog/roubini/232095/
"- First, you cannot use monetary policy to resolve credit and insolvency problems in the economy; and most of the crunch is due not just to illiquidity but rather to serious credit and solvency problems of many economic agents (households, mortgage borrowers, subprime, near prime and prime mortgage lenders, homebuilders, highly leveraged and distressed financial institutions, weak corporate sector firms).
- Second, monetary injections cannot resolve the information asymmetries and generalized uncertainty of a financial system where financial globalization and securitization have led to lack of transparency and greater opacity of financial markets; these asymmetric information problems that generate lack of trust and confidence and significant counterparty risk cannot be resolved with monetary policy.
- Third, the US is at this point headed towards a recession regardless of what the Fed does as the build-up of real and financial problems (worst housing recession ever, oil at $90, a severe credit crunch, falling capex spending by the corporate sector, a saving-less and debt burdened consumer buffeted by ten separate negative shocks) in the economy make a recession unavoidable at this point; similarly other economies are also now headed towards a hard landing as the US real and financial mess lead to significant contagion and recoupling.
- Thus, to mitigate the effects of an unavoidable US recession and global economic slump the Fed and other central banks should be cutting rates much more aggressively. The 25bps cut by the Fed yesterday is puny relative to what is needed; 25bps by BoE and BoC does not even start to deal with the increase in nominal and real borrowing rates that the sharp spike in Libor rates (the true cost of short term capital for the private sector) has induced. "
2. happyrenterz said...
Roubini continued...
- Fourth, the actions by the Fed today provide more liquidity to a greater variety of institutions but, as the Fed announced, these institutions are only “depository” institutions, i.e. only banks. The severe liquidity and credit problems affect today a financial market dominated by non-bank that do not have direct access to the liquidity support of the Fed;
- Fifth, this is the first real crisis of financial globalization and securitization; it will take years of major policy, regulatory and supervisors reform to clean up this disaster and create a sounder global financial system; monetary policy cannot resolve years of reckless behavior by regulators and supervisors that were asleep at the wheel while the credit excesses of the last few years were taking place.
3. Hpwatcher said...
Thanks, happyrenterz
I think Roubini is nuts if he thinks that even more debt is going to get us out of this mess.....it will only dig us in deeper.
4. techieman said...
Relative to LIBOR. The decoupling was more of the first throws of a divorce rather than a trial seperation imo. The central banks tried to get them back together yesterday - a kind of monetary RELATE, but the kids at least (short sterling futures) dont look like they trust the lawyers involved.
5. planning4acrash said...
This new found co-operation will only be worthwhile in the long run if international standards are formed to avoid frauds like sub-prime, i.e. the shoving under the carpet and mis-selling of high risk assets. At the moment? Bankers are still convinced that they have done the right thing and this is more of the same, a massive amplification of the moral hazard that we have seen the last few years.
6. drewster said...
happyrenterz - thanks for the summary. The big question seems to be how long the central banks can keep doing this? They've already pumped billions into the markets, how far can they go? Consumer debt in the UK is around £1300 billion, government debt is £574 billion (can't find numbers for corporate debt). The BoE has "lent" Northern Rock £24bn, this latest open market operation is £11bn. These all add up!