Thursday 27 October 2011

Le dernier ressort

"...The historical record shows abundantly, in contradiction of such theories, that financial crises are a persistent phenomenon and that they are generally, but not always, alleviated by a lender of last resort, often one that insisted in advance that it would not come to the rescue."

In his fascinating Financial History of Western Europe, Kindleberger describes the genesis of the lender of last resort and the gradual assumption of this role by central banks. But why should we care about our own financial history? Obviously This time is different...

here Paul de Grauwe on the ECB and the LLR.


  1. On a humorous note... (sometimes it is needed, specially for us Portuguese that are observing this chess game of politics, financial system, fiscal austerity, and debt contagion) - it sounds like Paul De Grauwe is a disciple of the renown "economist" called Zeca Afonso, in the sense that they both recognize the power of these "financial gods" and our doom - these were his words in 1984... history repeats itself:

  2. the G-20 released a list of 29 financial intermediaries (including commercial and investment banks) that dominate the world's financial system and therefore will have to raise their core tier 1 capital ratios above the Basel III requirements in order to minimize the probability of additional bailouts driven by the fear of systemic risk. Hopefully, this will be implemented in a timely fashion but I expect a considerable effort by lobbyists to delay/prevent its implementation as this will impact negatively the profits of these financial institutions.

    The list (European: 17, American: 8, Asian: 4): Bank of America, Bank of China, Bank of New York Mellon, Banque Populaire CdE, Barclays, BNP Paribas, Citigroup, Commerzbank, Credit Suisse, Deutsche Bank, Dexia, Goldman Sachs, Group Crédit Agricole, HSBC, ING Bank, JP Morgan Chase, Lloyds Banking Group, Mitsubishi UFJ FG, Mizuho FG, Morgan Stanley, Nordea, Royal Bank of Scotland, Santander, Société Générale, State Street, Sumitomo Mitsui FG, UBS, Unicredit group, and Wells Fargo.

    In Cannes, Sarkozy made a call for "No more tax havens"... this one is going to be even more difficult to implement. But hope is the last thing to fade away.

    Any thoughts?

  3. Where is the limit/criteria?
    In an extreme example, should a sovereign state be willing to raise its total debt to 200% of GDP, should the ECB print money to buy it?
    At what price?
    Stretching the argument a bit further, should an independent central bank perform due diligence analysis on different sovereign nations in order to rank them in "ability to pay" categories and establish debt prices?
    And finally, wouldn't that make the central bank the real government in charge as it would decide which governments/investments were worth financing and at what price?

    In a different approach: haven't irresponsible sovereign governments let their economies' national debt management slide out of control with questionable investment decisions?
    Should they just simply be bailed out and go on with business?
    And assuming they should, because in the end of the line there are some innocent human beings, what makes more sense, to provide controlled (and amortising) financing during a tight programme of fiscal adjustment via a temporary international solidarity fund, or to change the nature and mandate of the central bank (an unelected body) so that it can choose when and how to fund sovereign states in trouble?

    Before opening the ECB "pandora's box" it would be good to answer these questions. Until then I very much favour Germany's caution on the subject.

    thank you