Trichet Says Crisis May Limit Monetary Policy Leeway

Trichet Says Crisis May Limit Monetary Policy Leeway

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European Central Bank President Jean-Claude Trichet said financial market turmoil may leave central banks with less leeway to decide on interest rates.

“We are clearly concerned about the real impacts of the financial market turmoil, as it impacts also on the policy options of central banks, including monetary policy,” Trichet said at an economic policy forum at New York University yesterday. “We’re in a situation of high uncertainty, where risks are very difficult to quantify.”

The ECB has kept its key rate at 4 percent to fight inflation at a 16-year high, even as the economy of the 15 euro nations loses momentum. The International Monetary Fund on April 9 cut its euro-region growth forecast for this year and said the world economy faces a 25 percent chance of recession.

Source:
Trichet Says Credit Crisis May Limit Monetary Policy Leeway
Simone Meier and Sandrine Rastello
Bloomberg, April 15 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=auWA6GaK0fXk

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  1. rickrude commented on Apr 16

    Bernanke should convince these guys that
    central banks have alot of leeway

  2. frank commented on Apr 16

    I don’t really know enough to formulate a good question, but I’ll try to describe an aspect of the current economic crisis that I wonder about.
    As I read the newspapers the “thing” started with the invention of new views and stratagems for lending money and it started here in the US – banks and mortgage brokers worked together to encourage people to buy houses doing everything they could to complete the deal. Everyone seemed to be operating on the belief that housing prices would go up and the borrower could refinance to change the conditions of the existing loan to meet their needs. All sweetness and light. Always!
    Now I know nothing about money and banking and neither does my wife, but we’d sit in bed having morning coffee and sort of walking through the situation as we understood it and we came to the conclusion that it just would not continue to work. Something had to give.
    So my question is: how come two hermits living on an isolated mountain top in Vermont and having no training in finance and banking could see that the ramifications of this situation could be immense while PhD economists, the all too common “smart boys” of today, and city and state governments around the globe could not. I need not throw in politicians as exemplars of short sightedness.

  3. Joe Klein’s conscience commented on Apr 16

    Frank:
    I can’t answer that question. It appears that a fair number of people could see it coming(and very few of those worked on Wall Street). Wall Street didn’t want the party to stop. I think it is a case that people like you weren’t blinded by the light so to speak.

  4. Philippe commented on Apr 16

    I do not understand much either about economics business and politics altogether but this is what I read through
    There was an economic agreement in order to stimulate decaying economies through low and lower interest rates. They call that the counterbalancing of the Esher and Olhin theory or the laws of comparative advantages.
    There was a discovery that the intermediaries (Banks and their associates) were only inefficient as they could not allocate the surplus of liquidity in creating added value except in buying at higher price what existed before.
    The banks holding the savings of the people working in the real economy then turned to the central banks and testified that should low interest rate be not lowered, savings and deposits will be wiped out.

    I recommend that the rest of the story be told by

    Jean de Lafontaine
    « Les annimaux malades de la peste »

  5. Greg commented on Apr 16

    Trichet’s comments are tres ambigus: very, very ambiguous.

    Does he mean that things are so bad they can’t raise rates to deal with inflation?

    Or things are so bad that there’s no need to raise rates?

    Frank: I notice this issue every day. I live and work in a place with a still-booming housing market (far from US), where prices are completely out of control. The “uneducated” point of view is realistic (well paid people saying that since they can’t afford a house, something is wrong); the “professional” point of view seems to always find an explanation for why it can go on forever.

    I have to quote Spinal Tap all the time: it’s a fine line between clever and stupid.

  6. Brendan commented on Apr 16

    Frank,

    I find when it comes to issues that deal with politics, which this one does, the answer is always the same: power hungry egos. People like you and me are content to sit on that mountaintop and enjoy the view, but some people just have a switch flipped in their brains (arguably a personality disorder) that leads them to grasp for power no matter the cost. All these people you list are “smart” enough to know better, but their egos get in the way of actually applying that intellect. If you keep doing things to appease people, like giving money away (which is essentially what they did by not regulating lending properly), people will love you and vote you into power. And when the results of that irresponsible action are seen, you can just blame it on someone else (i.e. all those shady lenders… yeah… they did it), and most people will believe you, because, after all, they love you, and don’t really understand what’s going on. You can pretty much apply this to everything that happens in a democracy. People who go into politics generally have this disorder, because people like you and I would rather go hiking than run a campaign so we can see our faces on TV. Occasionally, one of us (or many of us, in the case of a revolution) get pissed off enough to try and fix things; but not usually until it’s too late.

    I know that’s not the answer you were hoping for; but it’s true!

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