Friday, August 8, 2008

Lessons from Crisis

The FT has a really interesting piece on the Credit Crisis today.

The piece begins with a nice quote from the post-Black Monday days and flashes forward to the present where (some) of the same conditions (computerized trading and equity index futures) were in play. What's old is new, forgetting the lessons of history, etc...

The interesting bit is in two parts. First, it calls for more regulation--after a decade and a half of hearing about deregulation, nearly every business/economic policy publication is calling for more. A regulation market correction if you will.

Second, it points to the big harm in the current crunch as the exposure of systematic weaknesses rather than specific losses. In looking at this issue the FT calls for a new/greater role for central banks.
Out of the credit crunch, therefore, must come change at central banks. New regimes under which they will lend, at penalty rates, against illiquid securities must be institutionalised. The Fed must take over responsibility for Wall Street, while the UK must push through a new insolvency regime for banks. Financiers are ever adept at circumventing rules but regulators must keep trying. As the example of 1987 shows, however, useful financial innovations such as securitisation will make a comeback, and it is up to investors to show greater discipline – a forlorn hope.

Is this expanded Monetarism designed to regulate through market forces?

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