Tuesday, February 19, 2008

ECB Observer No. 10: Credit crisis - causes and solutions (amv)

The tenth ECB Observer has been released. I really like the approach (there is, however, too much 'hydraulic' monetarism and too little capital-theoretical substantiation). The general outline of the argument may seem all too familiar to the regular reader of this blog :
"We [The ECB Observers] suggest that central banks’ overly expansionary monetary policies are (in great part) to be held responsible for the credit crisis. Too much credit and money at too low an interest rate have distorted market prices and encouraged investor ignorance of risk. Cutting interest rates in response to the credit crisis –as has been called for by various political quarters –would, we believe, increase inflation, thereby making the potential fallout of the credit crisis worse. We argue for a noninterventionist monetary policy, supported by free market forces, as a recipe for solving the credit crisis."