Monday, October 27, 2008

Mistakes or Necessary Benign-Neglect? (fg)

.... asks Oxford economist John Muellbauer on To him,
When future economic historians look back to trace the triggers for the October 2008 financial panic and the unnecessarily severe recession of 2009, they will likely put their fingers on two.

* The failure to keep Lehman Bros functioning as a going concern.
* The failure of the ECB and the Bank of England to use their interest rate setting firepower to organise a substantial globally co-ordinated interest rate cut (the 8 October 2008 cut was too timid).

Personally, I do not think his assesment is accepted by a majority of eonomists. In particuar, many commentators advocated the breakup of Lehman Bros. It should be a warning signal to financial markets to prevent moral hazard. Moreover, it was by now way cristal clear (to put it in the marvelous words of ECB president Trichet) that the overdue adjustment in the financial indutry will spill over that fast and massive. With inflationary pressure still on the upside risk, it was a good advice to let interest rates at a still moderate but not expansionary level.

Especially, the role of a lender of last liquditiy was perfectly played by international central banks. Rate cuts would not have been the solution to efficient liquidity management. Therefore, asking for a pre-emptive reduction of interest rates may have been ex-post an interesting advice; holding non-rate-cutting central banks responsible for the recession is too myopic - albeit the mistakes were indeed made at the beginging of the decade.