Tuesday, August 25, 2009

Yanks bung them rats and mice.

(Why does the MSM foreign press present the most cogent analysis of our cooking? -AM)

By Edward Hadas
Published: 11:53AM BST 24 Aug 2009

In a speech to the global conference of central bankers at Jackson Hole, Wyoming, the leading member of the profession blamed investors for the crisis and praised - would you believe it? - central bankers for their response.

The Bernanke narrative starts by glossing over a big mistake. Last year's meeting occurred weeks before the collapse of Lehman Brothers, which precipitated the biggest financial collapse in close to a century. Bernanke casually excuses this blindness, saying "we could not fully appreciate" what was coming a few weeks later.

As far as he is concerned, the reason things got so bad so fast was that investors freaked out. The crisis showed "some features of a classic panic".

This characterisation of the crisis conveniently lets forecasters off the hook. Mood swings, after all, are unpredictable.For Bernanke, central bankers were the heroes. In the face of irrational hordes, they offered liquidity and a host of innovative policies, ensuring that financial panic did not lead to a new Great Depression. In Bernanke's word, "the outcome could have been decidedly worse".

His assessment isn't exactly wrong. But as a historical record it is incomplete and far too generous to central bankers.

One reason the Fed and its peers did not anticipate the financial blaze is that they misunderstood the system's chemistry. Their own boom-time policies were an incendiary cocktail. A full account of the crisis would lay blame on interest rates kept too low for too long, poor supervision of lending and an excessively indulgent attitude towards financial innovation.

Those who spread kerosene should not take too much credit for putting out fires. The past errors suggest Bernanke is premature in praising the central bankers' decisive response. With ultra-low policy rates and extensive market support, central banks have entered unknown territory.

Bad results - high inflation, a feeble recovery or even another financial crisis - could yet trigger another of Bernanke's "panics"

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