One of these days I was wondering if we weren't heading towards a similar situation as in the run-up to the crisis. A prolongued period of low interest rates. Asset bubbles. Tech-stock and IPO's all over the place. And so on. And I recalled that one of the earlier FSF-reports had some good lines on that matter. The Report on Market and Institutional Resilience in April 2008 noted:
The turmoil in the most advanced financial markets that started in the summer of 2007 was the culmination of an exceptional boom in credit growth and leverage in the financial system. This boom was fed by a long period of benign economic and financial conditions, including historically low real interest rates and abundant liquidity, which increased the amount of risk and leverage that borrowers, investors and intermediaries were willing to take on, and by a wave of financial innovation, which expanded the system’s capacity to generate credit assets and leverage but outpaced its capacity to manage the associated risks.
What I found interesting in the aftermath of the report and its follow up, is that most attention focused on what banks, supervisors could do, but that central banks were kept out of the discussion and follow up. While the man in the street started taking up all the technical discussions in the report (on perverse renumeration inventives, capital buffers, securitisation that got out of hand, US housing market deficiencies), the role of central banks never made it to the spotlight of political discussion. Yet, it is clear that the central banks, providing easy money, played a very important part (as recognized by the words: including historically low interest rates).
And now, three years down the line, we have all fastened seatbelts with all kinds of regulations for banks, against short selling, increased buffers for Basel, risk tax for systemic institutions, new liquidity frameworks, harsher credit rating agencies and so on. But central banks maintain low policy rates that got us here in the first place.... so that makes me wonder: will history repeat itself?
We will soon find out.
