Monetary policy: Before the panic

Posted: November 11, 2013 in economy
Tags: , ,

LAST week the IMF hosted a research conference in honour of Stanley Fischer, which generated a heaping portion of fascinating monetary-policy discussion (some of which we discuss in this week’s paper). As part of the festivities, Ben Bernanke gave a talk, on the 2008 crisis as a “classic financial panic” akin to the crisis of 1907. As Mr Bernanke notes, this is not a new observation; indeed, the Federal Reserve recognised the parallels early on and policy was adjusted as a result. In both cases, you had financial losses of uncertain extent (in institutions exposed to a failed copper speculation in 1907, in subprime in 2008), runs on markets deemed to be vulnerable, asset firesales to cover losses, and a broad liquidity crunch, all of which contributed to big losses in the real economy.But I want to pick at a point Mr Bernanke doesn’t dwell on, but which strikes me as quite important. He notes:Like many other financial panics, including the most recent one, the Panic of 1907 took place while the economy was weakening; according to the National Bureau of Economic Research, a recession had begun in May 1907…The recent crisis echoed many aspects of the 1907 panic. Like most crises, the recent episode had an identifiable trigger–in this case, the growing realization by market participants that subprime mortgages and certain other credits were seriously deficient in their …

via Economic Crisis


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