There are number of analysts understanding the sub-prime crisis etc. In the crowd, Stephen Ceccheeti’s analysis stands out. His research on monetary policy and financial markets is outstanding.
He is a regular on voxeu.org, which is becoming a great place to find numerous economist’s views on numerous topics. Stephen Cecchetti’s page is here.
He has posted the learning from the sub-prime crisis in 4 articles:
All 4 are a must read. I agree with points 1 & 3. Central banks need to take risks from financial system and asset prices seriously. In some countries financial supervision is given to some other authority but this won’t work.
In Point 2 he makes a case that despot insurance is a much better option then lender of last resort, which is still debatable. I think we need both, financial products are getting really complex and so would the crisis in future. Both would be needed.
In point 4, he says Central banks have not created moral hazard. I don’t really agree. Financial sector don’t want any interference when times are good and take on excessive risks. Sub-prime means higher risk and most banks ignored it knowing they would be bailed out if things go wrong. The financial sector knows that it is very important for the whole economy and can afford to be careless in good times. It is the manner in which Central Banks in developed economies have reacted to the crisis. First they were ignorant and all of a sudden all central banks were caught wrong footed.
The solution is to take on the role of financial supervision aggressively and take restrictive measures when economy is booming. Otherwise moral hazard problems are only going to become bigger.