Archive for December 19th, 2008

Claudio Borio predicted the crisis too

December 19, 2008

I think we should just trash the idea that this crisis was unprecedented and no one could have predicted the set of events. It is basically that there were a few economists that saw events coming, it is just that they were ignored.  I had written a long article on 3 economists who predicted the crisis/ recession in different ways which I am linking below. However, the list seems to grow as Mark Carney of Bank of Canada points in a speech:

Few forecast these events; although, in an outbreak of retrospective foresight, an increasing number now claim they saw it coming. The reality is that among all the banks, investors, academics and policy-makers, only a handful were able to identify ahead of time the causes and potential scale of the crisis.

(The Handful were –  Bill White, formerly of both the Bank of Canada and the Bank for International Settlements; Harvard University’s Ken Rogoff; Nouriel Roubini of New York University; Wynne Godley of Cambridge; and Bernard Connolly of AIG Financial Products).

I came across this paper by Caludio Borio of BIS:

Since the 1980s, a number of episodes of financial market distress have underscored the importance of the smooth functioning of markets for the stability of the financial system. At the heart of these episodes was a sudden and drastic reduction in market liquidity, characterised by disorderly adjustments in asset prices, a sharp increase in the costs of executing transactions and, in the most acute cases, a “seizing up” of markets.

This essay explores the anatomy of market distress as well as the policy options to address it. It argues that, despite appearances, the genesis and dynamics of market distress resemble quite closely those of banking distress and that, contrary to conventional wisdom, the growth of markets for tradable instruments, and hence the greater scope to sell assets and raise cash, need not have reduced the likelihood of funding (liquidity) crises.

Read the entire paper and it is like deja-vu for you.  This grudge from William White (one of the people who sw things coming) who is Borio’s colleague (discussed in Bernanke’s profile):

Between 2004 and 2007, White and his colleagues continued to warn about the global credit boom, but they were largely ignored in the United States. “In the field of economics, American academics have such a large reputation that they sweep all before them,” White said. “If you add to that the personal reputation of the Maestro”—Greenspan—“it was very difficult for anybody else to come in and say there are problems building.”

Excellent paper.

The three men who predicted US crisis


Banks should maintain a leverage ratio

December 19, 2008

Philipp M Hildebrand, Vice-Chairman of the Governing Board of the Swiss National Bank, has given an insightful speech on governing  banks going ahead. He basically advocates the need for bank regulators to impose a leverage ratio which banks should maintain.

Leverage ratio is defined as Capital/Assets. In this crisis, banks (and other firms) having very low capital compared to the assets has led to much of the problem. He adds that this should not replace Basel norms of keeping capital as per risky assets but complementary to Basel norms. He also lists the problems with leverage ratio – off balance sheet items making calculation difficult, pro-cyclicality and profitability of the banks. Though,  he does not specify what that ratio should be, so we still need to work out.

Bank of Japan joins Fed and SNB

December 19, 2008

I  had pointed Swiss and Fed have  moved closer to 0% regime. Japan has always been near zero and has moved closer to zero now. It cut rates by 20 bps to 0.10% in today’s monetary policy meeting.

When will Japan get out of this mess?

Assorted Links

December 19, 2008

1. WSJ Blog points to another gloomy forecast. It also points to the new Fed Governor

2. Nudges points to an American Book in London’s Parliamentary Bookshop

3. Mankiw points to his concerns on fiscal stimulus

4. Fin Prof points is compensation to be blamed? It also points 36 univs have asked to be included in Obama plan

5. CTB points it isn’t about trade credit but falling demand

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