That was then, this is now
Martin Wolf wasn’t all that concerned back in January. He didn’t, for example, favor interest rate cuts as one tool in dealing with the credit issues in the US and EU. FT:
In times of panic, grown-ups keep their nerve. In a financial crisis, central banks must be the grown-ups. This week, however, the board of the US Federal Reserve seemed to panic by implementing an extraordinary 0.75 percentage point cut in its interest rates prior to its next scheduled meeting. The move was apparently in response to a falling (though still more than fully valued) stock market. So should the Bank of England follow suit? The answer is: no.
He seems a tad more concerned now about the current world economic situation and now favors rate cuts and a whole lot more, including very expensive recapitalizations of UK banks. FT:
As John Maynard Keynes is alleged to have said: “When the facts change, I change my mind. What do you do, sir?” I have changed my mind, as the panic has grown. Investors and lenders have moved from trusting anybody to trusting nobody. The fear driving today’s breakdown in financial markets is as exaggerated as the greed that drove the opposite behaviour a little while ago. But unjustified panic also causes devastation. It must be halted, not next week, but right now.
The time for a higgledy-piggledy, institution-by-institution and country-by-country approach is over. It took me a while – arguably, too long – to realise the full dangers. Maybe it was errors at the US Treasury, particularly the decision to let Lehman fail, that triggered today’s panic. So what should be done? In a word, “everything”. The affected economies account for more than half of global output. This makes the crisis much the most significant since the 1930s. First of all, the panic must be dealt with…
This panic is also going to have a big impact on economies. So central banks,other than the Federal Reserve, should lower interest rates. Only last week I thought a half-percentage point cut in rates made sense for the UK. If I were on the monetary policy committee today, I would argue for a full percentage point. The world has changed, greatly for the worse.
The finance ministers and central bank chiefs of the Group of Seven leading high-income countries will soon convene in Washington. For once, these are the right people. They must travel with one task in mind: restoring confidence. History will judge their success. These people may go down as the authors of another great depression. It is a destiny they must now avoid, for all our sakes.
Mr. Wolf had a once held a rosy view of the risks of lowering interest rates back in January. FT: “what are the risks? Unfortunately, they are large. One is indefinite continuation of an excessively low rate of US national saving. Others are a loss of confidence in the US currency and much higher inflation.Yet another is a further round of the very asset bubbles and credit expansion that created the present crisis.” Ah, those were the days.