End of the line for the old monetary regime

What does the financial crisis in the context of monetary policy? The answer may seem obvious. Central banks have responded to the stalling of interbank markets with massive injections of liquidity. When they ran out of room to maneuver with a short-term rates, they have a direct impact on the money supply through quantitative easing. As conditions stabilized, the question arises: when and how to tighten policy, so as not to push an already fragile economy back into recession or not to allow another major round of inflation.

Specific solutions have been widely obsuzhdaemy, but has been relatively little discussion about the purpose or structure in tactics. Since 1970 in Britain and the rest of the world was very much a political and theoretical agreement is that monetary policy should focus on price stability. To achieve this goal, it should be conducted by an independent body that will haunt the explicit target for inflation (or money supply, as the immediate goal). The crisis has made political decisions more difficult, but not put the structure in question.

However, we can not say the same about financial regulation. In this issue has never been a similar agreement on the objectives or the political structure, and much of what has been achieved in this regard – just flew out the window. At the moment there is some agreement on the changes that must be done: to raise the requirements for capital, especially in trade, tighten supervision; to tighten control over liquidity will (probably), and limits on bank bonuses. We still lack a common coherent regulatory scheme, but no one pretends that we have it, and at the same time, it seems we have enough political will to implement tough new rules to regulate.

The contrast between the two areas of public policy debate – monetary policy and financial regulation – are striking. In practice they are closely intertwined.

One of the first conclusions on the financial regulation is that one piece of the puzzle is missing: “prudential makropolitichekaya” function. Lord Turner is highlighted in his report to the UK, as well as Jacques yes Larozer in his – for the EU. Someone has to monitor not the risks posed by specific agencies, and the systemic risks that arise from the behavior by a group of institutions. For example, such analysis can determine the risk associated with the extensive use of various channels of the banks or dangerous tendencies associated with the prices of assets such as housing or credit secured by securities.

Thus, in the new world order focus will be on a prudent macro policies. For these purposes, the EU created the European Council on systemic risk, which is headed by Jean-Claude Trichet of the ECB with Mervyn King as a representative.

The fact that these two goals are in a position of potential conflict is not new, but has been traditionally poorly lit in the past three decades. Alternatively, to which we shall return, is the recognition that monetary authorities should pursue the goals that are complex and not amenable to simple planning.

Top bankers have been very silent on this issue. They may prefer to somehow bring the matter to an end, rather than revise their functions. The old approach to politics has a number of positive features. If the work of CB may be narrowly defined, then the politically easier and more profitable to actually ensure operational independence. But if the goal of the Central Bank must be complex, requiring him, to seek a compromise between competing political objectives, then the politicians will be more difficult to stay away from the monetary control.

The Financial Times
October 15