Damn the purists, greater good demands central bank intrusion
Government intervention may let the financially reckless off the hook but it can also prevent the wider economy from collapsing.
How long will it last? How low will it go? However much analysts bemoan excess leverage, financial chicanery and loose lending, it still seems to be the case that the global financial system is more robust and more versatile than in previous crises. What is more, central banks seem better equipped to deal with crises than they were in years gone by. On this basis the portents for a soft landing are good.
It is hard to see in the current turmoil countries going over like dominos or major bank collapses, though smaller states and banks could become victims. Obviously there have been excesses but it is a feature of financial markets that they overshoot in both directions – a characteristic much easier to explain by way of the Keynesian casino than sudden bursts of price discovery.
Robust environment
But for the present, at least, the evolutionist view holds that markets are relatively safer because the infrastructure is more efficient, regulation is better and the distribution of risk more even.
A feature of most contemporary crises is that central banks, governments and multilaterals get involved in ways that upset the market purists (see page 12). They argue that those who take advantage of excess liquidity to behave irrationally should be punished when the market turns. To do otherwise is to encourage moral hazard.
But frankly when global financial markets reach fever pitch there are greater interests to consider than those of a group of exuberant hedge fund and private equity investors.
A financial meltdown that devastates the real economy hurts the population at large – ask ordinary Thais and Indonesians how they suffered during the Asian crisis. Wise central bankers therefore see providing liquidity in a crisis as an important step to keeping the entire economy on track. The US Federal Reserve under Alan Greenspan and now Ben Bernanke has become a master at easing interest rates and monetary conditions to allow asset bubbles to burst without excessive fallout. Most notably this was done after the tech crisis allowing asset prices to adjust without widespread pain,
Can it be done again? Nothing is guaranteed in economics and it is true that the soft landing does not have the same remedial effects on reckless investors that a hard landing would. But for the greater good softer landings are better. Let us hope the central banks can once again pull it off.
