Axel Leijonhufvud, 26 October 2007

Here's some deep thinking on the linkages between monetary policy and financial instability. The trouble with inflation targeting in present circumstances is that constant inflation gives you no information about whether your monetary policy has hit the Wicksellian ‘natural rate’. Inflation targeting might mislead us into pursuing a policy that is actively damaging to financial stability.

Guillermo de la Dehesa, 19 October 2007

Uneven supervision gave an edge to risk takers in some nations on the up side, but the pain is being felt all around Europe on the downside. To avoid future crises, all mortgage originators should be regulated, banks should have to retain their “equity” or first loss risk, the rating agencies should be more transparent and independent, and Europe’s coordination failure among national supervisors should be fixed.

Vasso Ioannidou, Steven Ongena, José-Luis Peydró, 17 October 2007

Do low levels of short-term interest encourage risk-taking that can be considered ‘excessive’? Do low interest rates imply higher credit risk in the short-run? In the medium-run? New empirical research suggests that the answers are a resounding ‘yes’, a subtle ‘no’ and a qualifying ‘it depends’.

Ángel Ubide, 16 October 2007

The subprime crisis was first characterised as a liquidity crisis, but a month and billions of dollars of liquidity injections later, the situation has not improved. Perhaps it was not about liquidity, after all.

Dennis Snower, 28 September 2007

Economists can’t say: “we told you so.” Economists don’t have perfect foresight. But like doctors after the outbreak of a contagious disease – economists can tell you how the disease might spread, so that you may be better prepared. Here are some of the possible dangers ahead.

Luigi Spaventa, 06 September 2007

Securitisation transferred credit risk from bank’s balance sheets to the market. The subprime problem became a crisis when some of this risk landed back on banks. Regulators need to find a way to deal with the off-balance sheet operations of banks that made this possible and to improve transparency concerning banks’ effective exposure to risk.

Willem Buiter, 03 September 2007

A rate cut is unnecessary. Congress will swiftly augment the Bush bail-out, adding a fiscal stimulus worth, say, 0.5% of GDP. The anticipation of relief on both the fiscal and monetary side is likely to be enough to normalise credit conditions.

Tommaso Monacelli, 31 August 2007

The public is overreacting to the current turmoil in financial markets. The turmoil is most likely a situation where very specific problems are spread out extensively across investors and countries and thus the defaults are benign.

Stephen Cecchetti, 27 August 2007

The problem: About $1 trillion of commercial paper will mature in coming months. If issuers can’t roll it over, firms will turn to lines of credit that they have arranged as insurance against such events. Banks will be forced to make these loans, and credit conditions elsewhere will tighten. Such a credit crunch will inevitably slow the economy. This column explains the what's, why's and how's of the unfolding crisis and provides a progress report on the Fed's actions.

Tito Boeri, Luigi Guiso, 23 August 2007

The subprime crisis has its origin in Greenspan’s low interest rate policy. His successor should take care to reassure the markets in the short run without laying the foundations for a new overreaction “a la Greenspan”.

Willem Buiter, Anne Sibert, 18 August 2007

The Fed’s 17-8-07 move was a missed opportunity. It should have effectively created a market by expanding the set of eligible collateral, charging an appropriate "haircut" or penalty interest rate, and expanding the set of eligible borrowers at the discount window to include any financial entity that is willing to accept appropriate prudential supervision and regulation.

Charles Wyplosz, 17 August 2007

The Fed move, to cut the discount rate while keeping the Fed Funds rate unchanged, is both innovative and shrewd. It allows banks to liquefy discredited mortgage assets at low cost while leaving open the decision on monetary policy. It also leaves in the Fed’s hands the more powerful tool of cutting the Fed Funds rate if its action does not succeed in quieting market fears.

Marco Onado, 19 August 2007

The market participants who profited from creating the faltering debt instruments are not the ones who will pay most of the cost of the crisis; the losses will fall on the shoulders of final investors. Three things need fixing: credit ratings, evaluations of asset marketability, and transparency in the retail market for financial assets.

Charles Wyplosz, 16 August 2007

A basic principle of high uncertainty is to be careful. This principle also applies to analyses of the situation, even if decisiveness in the face of turmoil is at a premium. Better wait than make things worse. Here a few observations to sort through the emerging debate.

Stephen Cecchetti, 15 August 2007

A revised and updated version of the 13 August column on the basic how's and why's of what the Fed has been doing to calm financial markets.

Stephen Cecchetti, 13 August 2007

Here are the basic how's and why's of what the Fed has been doing to calm financial markets.

Willem Buiter, Anne Sibert, 13 August 2007

Last week's actions by the ECB, the Fed and the Bank of Japan were not particularly helpful – a classic example of trying to manage a credit crisis or liquidity squeeze using the tools suited to monetary policy-making in orderly markets. Monetary policy is easy; preventing or overcoming a financial crisis is hard; managing the exit from a credit squeeze without laying the foundations for the next credit and liquidity explosion is harder still. Central bankers should earn their keep by acting as market makers of last resort.



CEPR Policy Research