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英国论文网:British and Dutch GDP:The spread of the cri(41)


and smaller countries such as Denmark. Their exchange rates depend in part
on interest rate spreads with the major currencies. A co-ordinated global interest
rate cut would have widened spreads without these countries having to raise rates
to support their currencies in the face of severe recessions. Moreover, as late as
October 21st, many other central banks would have felt able to join a co-ordinated
cut without exposing their currencies.
More generally, the reduction in policy rates, and the prospect of more to follow,
would have reduced returns on safe assets, such as government bonds, and
induced investors at the margin to rebalance towards riskier assets, such as equity
and corporate debt. The rise in such asset prices would eventually have helped to
restore collateral values, slowing the spiral of rising bankruptcies.
Following the panic beginning on October 22nd, the task of restoring
confidence is far harder. With asset prices so much lower, the bad loan position of
the banking system looks worse, and with it, the potential burden on tax payers.
The damage for the UK looks particularly severe, with its debt and housing
market vulnerability – reflected in the sudden decline in Sterling and in Treasury
gilt prices.
Conclusion: Scrap the models and agree on a big, coordinated
rate cut
Why Europe’s key central banks made this potentially catastrophic error is a long
story. One reason, however, rests in their econometric models, based on fashionable
but outdated economic theory.
It is deeply ironic that central bankers who rightly have made much of the
moral hazard of bailing out private bankers, have adopted central bank models
excluding channels for real world moral hazard and credit crunches. These models
are overdue for the scrap heap. Central banks making policy without functioning
models are like aeroplanes flying without radar, and the consequences are
now obvious.
They now have a last chance to undo the damage of last week. They need to
put aside short-term currency wobbles, focus on the big picture and surprise the
markets with a much larger cut, probably of 2 percentage points. If international
The folly of the central banks of Europe 59
co-ordination is now harder to achieve, then leadership by the ECB and the Bank
of England will have to suffice.
References
John Muellbauer ‘Housing, credit and consumer expenditure.’ in Housing
Finance, and Monetary Policy: a Symposium sponsored by the Federal Reserve
Bank of Kansas City, Jackson Hole, Wyoming, August 30-September 1, 2007,
Federal Reserve Bank of Kansas City, 2007, p. 267–334.
60 The First Global Financial Crisis of the 21st Century Part II
30 September 2008
Europe’s largest banks are highly leveraged and thus vulnerable, as Fortis showed.


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