Clamor grows for more central bank intervention -- at least in Financial Times

Economist Forecasts Central Bank Action

By Chris Giles
Financial Times, London
Sunday, March 23, 2008

http://www.ft.com/cms/s/0/7816b7d8-f90e-11dc-bcf3-000077b07658.html

Central banks and governments in advanced economies will be forced to buy mortgage-backed securities within the next few months to stop the credit crisis, according to a former chief economist of the European Bank for Reconstruction and Development.

"Central banks will be managers for years to come of rather interesting portfolios," predicted Professor Willem Buiter of the London School of Economics, as the Federal Reserve and the Bank of England sought to play down conversations officials have had regarding purchases of mortgage-related assets.

The Financial Times reported on Saturday that conversations had taken place concerning such plans, as part of a broader, early-stage exchange as to possible future steps in battling financial turmoil.

That such a move is being discussed at all indicates the depth of concern that exists over the health of the banking system.

Central banks have been improvising policy in recent months as the credit crisis has deepened despite successive rounds of co-ordinated interventions in money markets and specific intervention in financial institutions such as Northern Rock, the British mortgage lender, and Bear Stearns, the US investment bank.

"Precedents are being broken at a rate of two a minute," Prof Buiter said, praising central bankers for the flexibility they are showing.

Both the Fed and the Bank of England rejected any suggestion they were proposing to buy mortgage-backed securities or were discussing firm plans to do so.

A senior Fed official said: "The Federal Reserve is not involved in discussions with foreign central banks for co-ordinated buying of MBS."

A Bank of England spokesman said: "Central banks, including the Bank of England, have been looking at ways to ease the strain. The BoE is not, however, among those reported to be proposing schemes that would require the taxpayer, rather than the banks, to assume the credit risk."

The bank added it was still too early to go into details on what it was discussing.

However, bank officials have been looking at reforming its standing facility for overnight borrowing, a lending option similar to the Fed's discount window.

This facility, which allows unlimited borrowing against good collateral at a rate 1 percentage point above the policy rate, has not been used since August as it has become stigmatised.

The bank is also undertaking a review of the collateral it accepts when lending to banks or buying assets.

Common to all central banks, one problem the bank faces is how to value the weaker-quality collateral and how to determine what discount from face value it should take.

The problem is compounded because central banks are now accepting wide lists of collateral with highly variable probabilities of default.

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US Can Learn from Japan's Crisis

By Michiyo Nakamoto
Financial Times, London
Sunday, March 23, 2008

http://www.ft.com/cms/s/0/18972048-f90b-11dc-bcf3-000077b07658.html?ncli...

TOKYO -- The United States should inject public funds into its financial system, which is undergoing a worse crisis than that experienced by Japan during its non-performing loan crisis, according to Japan's financial services minister.

"It is essential [for the US] to understand that given Japan's lesson, public fund injection [into the financial sector] is unavoidable," Yoshimi Watanabe told the Financial Times.

Although "it is very difficult for Japan to convey such a message to a foreign government  ... Japan could, for example, convey -- through the G7" meeting of finance ministers "or central bank governors' meeting Japan's lesson and that we are prepared to take co-ordinated action if necessary" to help resolve the situation, Mr Watanabe said.

US and European central banks are to consider the possibility of using public funds to purchase mortgage-backed securities as a potential remedy for the crisis.

The remarks are the first public expression of concern by a Japanese cabinet minister that the impact of the current financial market turmoil could be much more serious than Japan's experience during its "lost decade" of abnormally slow economic growth in the 1990s.

Mr Watanabe warned unless swift and appropriate action was taken by world leaders, the financial market turmoil could lead to a severe dollar crisis.

He said the world's huge excess liquidity has started flowing out of the US. If that flow were to be extended, it could lead to unprecedented problems.

"One thing is to fix the hole in the bathtub," he said. But "we must recognise that the current crisis is not as straightforward as past dollar crises."

He had no comment on whether Japan might cut interest rates in a co-ordinated response. Any decision would be made by the Bank of Japan, responsible for monetary policy but headed currently by an acting governor.

The minister said that while the US credit turmoil was structurally similar to Japan's at the time of its bad debt crisis, there was an important difference in that risk in Japan was contained in the banking sector. In the US, it had been dispersed widely into other areas of the financial industry. So "it is not clear how big the hole [in the US] is because the fire has spread to products other than securitised products."

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