Liquidity in the financial crisis: New insights on the lender of last resort
Pierre-Olivier Weill, Guillaume Rocheteau, Ricardo Lagos 16 December 2009
Following the last run on a British bank over 130 years ago, Walter Bagehot argued that central banks should act as a lender of last resort. While such policies have been followed by central banks in today’s crisis, this column updates the recommendation by suggesting central banks should also act as a “liquidity provider of last resort”.
Under every central banker’s bed is a copy of “Lombard Street” by Walter Bagehot. Published in 1873, it argues that the central bank should act as a lender of last resort during crises to ensure that financial intermediaries have the resources to provide liquidity in asset markets. The name comes from the London base of Overend, Gurney and Company who in 1866 were the subject of the last run on a British bank before Northern Rock in 2007.
Central Banks, Federal Reserve, global crisis, ponetary policy
Adjustments to the accountability and transparency of the European Central Bank
Sylvester Eijffinger 24 October 2009
Governments are restructuring their financial supervision systems. This column warns that the proposed new structure for European financial supervision is poorly coordinated and will not help in a systemic crisis. It discusses how the ECB might coordinate macro-prudential supervision in the euro area.
It is widely agreed that central banking should not be subject to "political business cycles". Consequently, in the last decades, it has become an integral part of modern central banking policy that full operational (or functional) independence of central banks is a welfare-enhancing quality. However, the objectives of the central bank should then be clearly defined from the outset, the bank should be accountable for its actions, and the public should have a solid trust in its actions. The ongoing crisis may well have made central banking more complicated.
ECB, Central Banks, financial supervision
The global crisis and central banks in Latin America: Breaking with the past
Luis I. Jácome H. 20 October 2009
Latin American central banks seem to have weathered the global crisis quite well. This column describes their policy responses and says they succeeded in lowering inflation, averting banking crises, and shortening the recession. It attributes their success to past reforms that created strong institutional foundations and effective policy frameworks.
Latin America has a history of recurrent financial crises that took a large toll on economic growth and fuelled social unrest. Frequently, these crises were triggered by exogenous shocks, which unveiled macroeconomic and/or financial weaknesses, leading to simultaneous banking and currency crises. Financial crises, thus, became a primary source of macroeconomic instability and a reason for social frustration, as vast groups of the population, in particular the poorest, often lost their jobs, real income, and savings.
Central Banks, banking crises, global crisis
Money market tensions and international liquidity provision during the crisis
Raphael Auer, Sébastien Kraenzlin 14 October 2009
The world’s major central banks used underpublicised swap agreement to address mismatches in their currency-specific liquidity needs during the crisis. This column says these measures where highly effective and came at a very low cost.
The recent crisis has triggered a wide spectrum of policy responses, including many policies that were unthinkable two years ago. One of these unthinkable policies was the decision of the world's major central banks to engage in reciprocal swap agreements, which involve a central bank handing out liquidity denominated in foreign currencies to its counterparties.
Central Banks, currency markets, swap
'No one saw this coming' – or did they?
Dirk Bezemer 30 September 2009
Did economists not see this crisis coming? This column says that analysts who used models featuring a distinct financial sector issued fairly detailed, well reasoned, and public warnings of imminent finance turmoil. It argues that mainstream models missed the crisis because they use a “reflective finance” view in which financial variables are wholly determined by the real sector. “Flow of funds” models may be the way forward for anticipating finance-induced recessions.
From the very beginning of the credit crisis and the ensuing recession, it has become conventional wisdom that "no one saw this coming". Anatole Kaletsky (2008) wrote in the The Times of “those who failed to foresee the gravity of this crisis - a group that includes Mr King, Mr Brown, Alistair Darling, Alan Greenspan and almost every leading economist and financier in the world.” Glenn Stevens (2008), Governor of the Reserve Bank of Australia, said:
Global crisis Macroeconomic policy
Central Banks, global crisis, flow of funds
Misdiagnosing the crisis: The real problem was not real, it was nominal
Scott Sumner 10 September 2009
Do most macroeconomists hold views of this crisis that are entirely at variance with modern monetary economics? This column says that tight monetary policy caused the crisis. Economists seem not to believe what they teach about the fallacy of identifying tight money with high interest rates and easy money with low interest rates.
Here is a puzzle. Almost everything we have learned from recent research in monetary history, theory, and policy points to the Federal Reserve as the cause of the crash of late 2008. More specifically, an extremely tight monetary policy in the US (and perhaps Europe and Japan) seems to have sharply depressed nominal spending after July 2008. And yet it is difficult to find economists who believe this. More surprisingly, few economists are even aware that their views conflict with the standard model, circa 2009.
interest rates, monetary policy, Central Banks
The crisis and citizens’ trust in central banks
Daniel Gros, Felix Roth 10 September 2009
Most observers agree that central banks can claim partial credit for the stabilisation that have been achieved and the prospect of a recovery. This column warns that the general public seems to hold a completely different opinion; trust in central banks has declined and the reaction of central banks to the crisis is generally judged as unsatisfactory. Central bankers all over the world should redouble their efforts to regain the trust of the people towards their institution.
Central banks seem to be enjoying a “good crisis”. They have lowered interest rates to near zero and used unconventional approaches to stabilise financial systems. Most observers agree that central banks can at least claim partial credit for the stabilisation that now seems to have been achieved and the prospect of a recovery that now seems tangible (see for example Gerlach et al., 2009 and Cecchetti, 2008).
Central Banks, trust
César Molinas 01 April 2009
Deflation risks are more related to very low inter-temporal discount rates than to falling prices. This column argues that long-term pre-emptive action should be channelled through taxation rather than central banks.
In principle, there is nothing wrong with falling prices. As the argument goes, excess supply brings about lower prices, higher real money balances, lower interest rates and higher aggregate spending. The demand curve shifts to the right (responding to the previous shift of the supply curve) and a new equilibrium is reached at a higher level of output and (if the money supply does not grow enough) a lower price level. In order to get persistent deflation from a fall in prices, something has to go wrong in the causal chain.
Central Banks, Gamma discounting, inheritance tax
The Fed, the Eurosystem, and the Bank of Japan: More similarities or differences?
Francesco Paolo Mongelli, Dieter Gerdesmeier , Barbara Roffia 07 February 2009
This column systematically compares the US Federal Reserve System, the Eurozone central banking system, and the Bank of Japan’s institutional structures and monetary policy frameworks.
Central banks have always been important players in financial markets. They set key interest rates, which are at the origination of the monetary transmission process, they are monopoly suppliers of base money, and they perform a number of other tasks and functions. Central banks can better perform their mission and fulfil their goals when they are understood by the public and other policy makers. One of the youngest members of the central banking community is the Eurosystem (a supranational central banking system).
Central Banks, monetary policy frameworks