We know at least two things about the financial crisis. The first is that they occur with such frequency having to consider an integral part of capitalism. Since the beginning of the seventeenth century to the present day we have had, on average, once every eight years since the end of Bretton Woods once every two years. Therefore, we must have adequate tools to address them. The second is that, regardless of how it was created, the crisis leads to a collapse of credit. This, in turn, reflects two important phenomena: the state of uncertainty about the soundness of the operators and travel to the liquidity of financial intermediaries who want to lower the ratio between assets and equity. The crisis, like war, creates a dense fog that dims the sight of counterparts and makes them uncertain about their relative positions. Not only increase the information asymmetries between banks, companies, investors, authorities, but also between the banks themselves. This marks the seriousness of the current crisis.
The major central banks in the world since August last year, spared no effort in trying to meet the exceptional demand for liquidity. They created the monetary base (later partially sterilized) and with open market operations is with loans, guarantees, with each institution. The Fed has reduced the gap between the discount rate and the interest rate target, has opened access to the discount window to non-bank intermediaries, lengthened the maturities of loans and liberalized the criteria on securities listed as collateral. A resurrected Walter Bagehot could not do without that welcome the way in which central banks have fulfilled the role of provider last resort. Governments, although late, have established programs to recapitalize banks and offer guarantees, whether overt or implied, on a wide range of debt issued by banks and money market funds.
Despite this large input of resources, the credit customer is blocked and is dragging the economy into a downward spiral real depression. The pipes in the interbank market, where the counterparties are buying and selling large amounts of deposits with no guarantee of collateral, are blocked over the payments that go beyond 24 hours. The evolution of the TED, or the spread between the interest rate on three-month dollar LIBOR and the yield of U.S. Treasury bills, gives an idea the seriousness of the problem. In "normal" conditions, the TED falls below 20 basis points (bps). The financial crises in Mexico (1994) and South-East Asia (1997), TED rises to about 70 bp, and during the Gulf War (early nineties) and the rescue of Long Term Capital Management (1998) comes to 120 pb . The subprime crisis immediately raises the TED beyond any previous, for weeks. The growth of TED furiously resumed in September this year. On 18 September, three days after the failure of Lehman Brothers, TED reaches 316 bp. On 10 October, after a terrible week for world stock exchanges and the frenzy of the TED record is maximum of 464 bp. While the Fed to provide liquidity in the money market to 150 bp, if the banks lend to three months if the pay-as-a premium of nearly 350 bp. Monetary policy was frustrated by a tilt in the interbank market, surrounded by a dense fog of mistrust.
Exceptional situations call for exceptional measures. Although late, it's worth considering the creation of a parallel mechanism, provided temporary, the interbank market. The central bank should provide funds to three months out of warranty, at a rate higher than the marginal lending rate (in the U.S. discount rate ) would compensate for the difference the exclusion of warranty on the new mechanism. If allowed, as is the case with the ECB, the banks to settle overnight excess liquidity, the central bank would take a role in the transformation of maturities nell'interbancario "institutional" parallel. Unlike the relationship between bank and bank, the one with the central bank would reduce two pernicious effects that afflict the interbank market. The first is the distrust that now risk brake on the lending bank funds. In the bilateral relationship, this risk would be borne only on the central bank, however, has informational advantages compared to traditional banks. Once relieved the problem counterparty risk, the new rate to delimit the corresponding three months at market rates. The second effect concerns the problem of coordination: the first bank that is willing to lend funds to a second bank in three months if he does not fear that other banks also lend to three months. In the bilateral relationship with the central bank, the coordination problem does not arise.
The new mechanism would help to revive the market for "wholesale interbank flows" on intermediate maturities at interest rates driven by the rates policy . The three-month LIBOR is a reference rate for a myriad of credit agreements, including mortgages. Once stabilized the interbank market, banks would have incentives to reduce the demand for money and loosening the cords of the credit, while central banks could focus on an expansionary monetary policy that reduces the risk of a worldwide depression.
Pietro Alessandrini and Michele Fratianni
in Il Sole-24 Ore, October 30, 2008.
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