Read the article and give your opinion.Â
Lees hier het bijbehorende artikel en reageer.
Statement:The US Fed should have been supplying funds to troubled financial firms as freely as the European Central Bank/ Stelling: ‘Om rust in de financiële wereld te krijgen, is het goed dat Europese centrale banken extra geld beschikbaar stellen aan banken’
apr 21st, 2008 by Redactie Kennisdebat
Hello,
I have read your statement and I must say I do not agree to it. By acting as lender of last resort, the Central Bank induces moral hazard and allows banks to take risks they otherwise would not have taken. After some firms go bankrupt, the Central Bank should just allow recession to clear away the unprofitable projects. Instead, if it intervenes in the manner suggested in your article, the bad projects are kept, no sanctions are delivered, there is no lesson learnt, and the economy runs a high risk of prolonging the recession and having high inflation.
Best regards,
Laurentiu Tirca
IE&B
Laurentiu,
Moral hazard is indeed a risk, but this should be weighed against systemic risks. I think the Great Depression has demonstrated that a wave of bank failures can be more damaging for the economy than excessive risk-taking ever was. I therefore think it is useful to distinguish between short-run liquidity support and propping up insolvent banks.
With liquidity support, the insolvent will still go bankrupt due to a lack of sufficient collateral: witness the bankruptcies of many specialized mortgage lenders. Nearly wiping out the shareholders of Bear Stearns was also surely a measure to avoid moral hazard. Of course, one cannot be sure that the liquidity support was actually necessary to prevent systemic failure: there is (luckily) no counterfactual. Still, a prudent central bank will trade off a certain degree of moral hazard against the much bigger risk of systemic failure.
Regards,
Robert
Het lijkt me aan goede zaak. Als de overheid niet ingrijpt zullen er banken failliet gaan. Aangezien de hele economie valt en staat met het vertrouwen dat mensen in geld hebben, kan de overheid niet zomaar een bank failliet laten gaan. Mensen zouden dan en masse hun geld gaan opnemen. En daarmee zou een land uiteindelijk in een diepe crisis terecht komen.
Everybody is talking about the “bad loans” but the current situation has a much deeper reason. It started a long time ago when the US stopped the Bretton Woods Agreement. From that time on the “foundation” of money started to float. The Bretton Woods agreement was created to prevent a third world war because the second world war was caused by floating money. It was a big mistake to make one country in the World responsible for the stability of the World Economy. I know there was no choice at that moment. The Great Depression was caused by the same problem. The UK was unable to hold the golden standard and used the US to get out of trouble. At this moment it is very difficult to see that the world is floating on a huge bubble that has to explode someday. Many people are trying to prevent this to happen but the only thing they are doing to postpone the explosion. I am sure nobody really knows what the current position is of the Banks. The Bankers don’t know, the Accountants don’t know and of course nobody in Government knows. The positions are so complex and so interrelated that everybody is just waiting hoping the next crisis will not hit them. Pumping money in banks will not help at all. The Banking Industry is at the end of its life cycle and we just have to move to another System that stable and most important transparent.