You know, Carter, we're a little off the beaten track but then again, you guys of the super highway of international finance haven't been doing all that good lately, so none of your snide little comments please!
All kidding aside, I don't think I'm proposing a world lender of last resort and I sure as hell wouldn't propose anything that involves the IMF unless we go back on the gold standard (now there's an idea). It just seems to me that interconnection of markets and the lack of time it takes these days for the growth enhancer to hit the air circulation mechanism(see our old friend Anonymous' comments to Friday's discussion with which we will deal tomorrow), the tried and true methods of the past are not going to cut it going forward. Whilst I have always admired the informal and confidential manner in which central bankers delt with their international counterparts the time has come I fear to formalize the arrangements that were always decided informally. It can't be done on an ad hoc basis any longer; the world moves too quickly.
This is a hell of a problem to be sure. Firstly, and most importantly, central banks must be independent and to be honest, in periods of crisis this may well be a pipe dream. But what can be done, as you have suggested, is to agree that only the systemic institutions count and then the job will be to identify those institutions on a global basis. A crisis with the Bank of America is no different than a crisis with DeutschBankin in the global society of today. Unless one is ready on a coordianted basis to isolate and control we are certain to have more chaos in our future, which is another way of saying that you guys (assuming you are somewhere in the Fed) better start talking to those guys on a far more direct basis not about Basel III but what happens when we go into the crapper again. And the heck with bipolar worlds; when China's property market tanks, I wonder where HSBC will be vis-a-vis their correspondents when they begin to wonder whether or not they are involved? I would further suggest that the corrolation between monetary and fiscal policy in a crisis situation is, at best, an interesting academic discussion.
Well, what would it take to "formalized arrangements" between countries. Probably a treaty: can you seen the US and China agreeing to such a treaty (we won't even let them bank here). The europeans (ironically) have a better chance, given the growing bilateral agreements on the supervision of the large firms (see Nordic stuff).
ReplyDeleteCentral banks are useful because they can do things that the sovereign should, but won't (for domestic political reasons) do. Witness both Fed actions during the crisis and ECB actions of late. But they need the tools to do so, and the politicians have taken the tools away after the CBs "spent" money the politicians must now pay for. And CBs can't commit their sovereigns to share losses.
Banking is about credit, and credit is about trust. The world can probably handle when one bank becomes uncreditworthy/untrustworthy, but not when the entire system becomes uncreditworthy simultaneously (due to an asset collapse). And at some point a sovereign becomes uncreditworthy when it can't print its own currency and its assets (its banking system) have wasted away.
The problem may be that "financial deepening" has gone too far in some societies. Perhaps it comes down to a frank conversation between countries about whether they can support their financial systems in the time of a crisis, but I fear ex-ante political promises are worth next to nothing.
I wish I had a better answer.
BTW: Kyle Bass has an interesting letter out today.
ReplyDeletehttp://www.zerohedge.com/sites/default/files/Kyle Bass Feb 14.pdf
Excerpt:
"We continue to be very concerned about systemic risk in the global economy. Thus far, the systemic risk that was prevalent in the global credit markets in 2007 and 2008 has not subsided; rather, it has simply been transferred from the private sector to the public sector. We are currently in the midst of a cyclical upswing
driven by the most aggressively pro‐cyclical fiscal and monetary policies the world has ever seen. Investors around the world are engaging in an acute and severe cognitive dissonance. They acknowledge that excessive leverage created an asset bubble of generational proportions, but they do everything possible to prevent rational deleveraging. Interestingly, equities continue to march higher in the face of European sovereign
spreads remaining near their widest levels since the crisis began. It is eerily similar to July 2007, when equities continued higher as credit markets began to collapse. This letter outlines the major systemic fault lines which we believe all investors should consider."
Maybe the Fat Lady hasn't sung yet.