Tuesday, October 29, 2013

The Most Powerful Men in the World & the Crisis of the Global Financial System (2013)

After becoming Bank governor, King explained that Bank of England policy was "similar to that of the Federal Reserve" under Alan Greenspan. Greenspan described his approach as "mitigat[ing] the fallout [from the bursting of a bubble] when it occurs".[12] King agreed with Alan Greenspan that, "It is hard to identify asset price 'bubbles'."[12] Other warnings about the UK housing market followed, including from the National Institute of Economic and Social Research in 2004[13] and the OECD in 2005.[14] King noted the "unusually large" difference between the RPIX and CPI at the beginning of 2004 (the latter does not include house prices as part of its inflation measure, whilst the former does),[15] and, six months later, that UK house prices had risen "to levels which are well above what most people would regard as sustainable in the longer term", having increased by more than 20% over the preceding year and more than 100% over the preceding five.[16]
In 2005, The Economist described the run-up in UK house prices as forming part of "the biggest bubble in history",[17] and, by October 2007—when the UK housing bubble was at its peak[18]—the IMF was reporting that the UK housing market was "overpriced by up to 40 per cent".[19] As noted by the OECD, house-price volatility "can raise systemic risks as the banking and mortgage sectors are vulnerable to fluctuations in house prices due to their exposure to the housing market."[20]
Dean Baker in The American Prospect said the failure by Greenspan and King to tackle the bubbles in their respective countries' housing markets resulted in catastrophic "fallout" when the bubbles burst, resulting in the worst recessions in both countries since the Great Depression.[21] UK--US inaction may be compared to action taken by China[22][23][24][25][26] and Australia.[27] Another result of the financial crisis has been King's rejection of the Bank's devout focus on price stability, or inflation targeting, a policy that was instituted after Black Wednesday in 1992 and that was continued by King after becoming governor in 2003.[28] One of the two early lessons King drew from crisis were that "price stability does not guarantee stability of the economy as a whole" and that "the instruments used to pursue financial stability are in need of sharpening and refining."[29] Accepting King's narrow concentration on price stability had resulted in disaster, the 2012 Financial Services Bill, in transferring the majority of macroprudential regulatory powers from the FSA to the Bank, will grant the Financial Policy Committee (chaired by King) the power to curb lending in booms, including placing limits on the public's access to mortgages.[30] Overall, one former, senior BoE official summed up the Bank's pre-crisis performance well: "How can you look back with the benefit of hindsight and see it as a success? We were responsible for financial stability and we utterly failed to take any avoiding action against the greatest financial crisis in our lifetimes".[6] David Blanchflower noted that, even as late as the summer of 2008, King did not even see the financial crisis coming.[31]
In its review of Bank of England accountability, one of the major complaints of the Treasury Select Committee was the Bank's refusal to undertake an internal review of its performance during the financial crisis,[32] meaning the Bank has still not been held properly accountable for its substantial culpability.[30] Such a review would pose difficulties since evidence on how its most senior policymakers arrived at their decisions is destroyed as a matter of course, as are those of the meetings of the interim Financial Policy Committee, which was set up in 2011 as part of the Bank's greater responsibility for financial stability.[32] By contrast, the United States publishes the Federal Reserve's deliberations with a five-year lag, which have provided "the most detailed picture yet of how top officials at the central bank didn't anticipate the storm about to hit the U.S. economy and the global financial system."[33] As in the UK, the US central bank's devastating failure has led to a new regulatory framework, the 2010 Dodd--Frank Wall Street Reform and Consumer Protection Act, giving more supervisory power.


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