Tuesday, July 01, 2008
If ever there was an indictment of the Greenspan term at the Federal Reserve, it is yesterday's 78th Annual Report from the Bank for International Settlements (BIS), the so-called "central bankers' bank".
After discussing at great length the many ills now facing the world financial system and a few proposed solutions in a new "macrofinancial framework" - such common-sense practices as higher interest rates and better governance - they go on to note the following in the conclusion to the 149 page report:
There are many practical impediments to making a macrofinancial framework operational. The first is that not everyone accepts the hypothesis that excessive credit growth is the root of the problem. Nor is everyone agreed that it might prove difficult to clean up the mess after such periods of excess.Methinks this is a reference to someone with whom we are quite familiar.
The former Fed chairman's name was never mentioned, so this can't be officially counted as a "Greenspan Mess sighting", but the point is clear - despite continuing claims that he would not have done a thing differently, he probably should have.
Outgoing BIS chief economist William White seems to have channeled his inner-Austrian one last time after doing so magnificently in both 2006 and 2007, the Financial Times characterizing the 2008 edition a "valedictory report".
The key conclusion, one that should be obvious to anyone who has taken even a cursory look at the differences between Keynesian economics (as it is practiced today) and Austrian economics, was that it would have been better to avoid a build-up of credit excesses in the first place, paying attention to more than just consumer prices and traditional measures of financial market stability.
A few more highlights, first on the "shadow banking system", the source of what was, by far, the largest source of non-traditional financial market instability:
How, for example, could a huge shadow banking system emerge without provoking clear statements of official concern? Perhaps, as with processes for internal governance, it is simply that no one saw any pressing need to ask hard questions about the sources of profits when things were going so well.On the root cause of the current crisis:
The fundamental cause of today’s emerging problems was excessive and imprudent credit growth over a long period. This always threatened two unwelcome outcomes, although it was never clear which would emerge first. One possibility was a rise in inflation as the world economy gradually approached its near-term production potential; the second was an accumulation of debt-related imbalances in the financial and real economy which would at some point prove unsustainable and lead to a significant economic slowdown. In the event, the global economy now seems to be experiencing both unwelcome phenomena at the same time...On asset prices and government solutions:
Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must eventually fall. If saving rates are unrealistically low, they must rise. And if debts cannot be serviced, they must be written off. Trying to deny this through the use of gimmicks and palliatives will only make things worse in the end.Three policy recommendations were offered as a way to improve crisis prevention and crisis management in the future:
The first salient feature of such a framework would be a primary focus on systemic issues. Attention would be placed on the dangers associated with many institutions having similar exposures to common shocks, for example a turn in the property cycle.It all seems so obvious now.
The second feature would be a much more “symmetrical” or countercyclical use of policy instruments. They would be tightened in the expansionary phase of the credit cycle and eased in the downturn. ... To be more specific, monetary policy might be tightened even with projected inflation under control, given a sufficiently worrisome combination of rapid credit growth, rising asset prices and distorted spending or production patterns.
A third feature would be still closer cooperation between the central banking and regulatory communities in trying to identify the build-up of systemic risks and in deciding what to do to mitigate them.
Well, actually, to some, it's been obvious for quite some time.