Thursday, September 13, 2007

Central Bank Trash Talk

The NY Times reports:
In an unusual public display of discord, the British central bank criticized other central banks yesterday for injecting cash into the financial system to help stabilize credit markets, saying that such a policy amounted to a bailout of investors who made bad decisions.
The swipe came in this testimony submitted by Mervyn King, the Governor of the Bank of England (Britain's central bank - King's position is equivalent to Ben Bernanke's in the US) to a Parlimentary committee:
The main thrust of his written testimony to Parliament, however, was a sharp warning about “moral hazard” — a term used to describe the downside of policies that effectively rescue investors when their bets turn out wrong.

“The provision of such liquidity support undermines the efficient pricing of risk by providing ex-post insurance for risky behavior,” Mr. King wrote. “That encourages excessive risk-taking and sows the seeds of a future crisis.”

He didn't name names - the British do that understatement thing - but that could be taken as a strong implicit criticism of the Fed and European Central Bank, which have actively tried to inject funds to stabilize financial markets (earlier posts on the Fed's actions here and here).

Update (9/14): Perhaps he spoke too soon. The Bank of England is bailing out Northern Rock, a mortgage lender. Willem Buiter says: "I can only conclude that the Bank of England is a paper tiger. It talks the ‘no bail out’ talk, but it does not walk the talk."

1 comment:

Bernardo Aito said...

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best,

Bernardo