Central banks have limited options in crisis
BusinessMirror, February 8-9, 2008

He earlier deliberately kept himself away from making any kind of forecasts, but later over dinner, Finn Erling Kydland, Nobel laureate for economics in 2004, spoke about the inability of central banks to do much about problems like the subprime mortgage-lending crisis in the US.

"There is not much central banks can do," Kydland said when asked about his thoughts on the crisis that has forced US authorities to propose the injection of $150 billion to avert or soften the impact of a feared recession.

Owing to the globalised nature of financial transactions, “everyone is
Influenced by what happens with the rest of the world," he added.

He disagreed with the US Fed and its attempt to boost stock market through a series of interest-rate cuts, saying central banks in general "are supposed to provide a low-inflation environment."

According to Kydland, the subprime crisis has "more to go" before it unravels fully leading to a downturn in corporate earnings and reductions in purchases and consumption levels. The consequent timidity of banks to lend would then become a problem.

“If the banks become too cautious, that will be bad,” he said.

“But maybe there is something central banks can do to ensure they don’t go overboard,” he added.

In a light moment, Kydland said the close proximity of Manila’s fiscal officials and their monetary counterpart was rather “suspicious.”

He was told the Financial Secretary Margarito Teves holds office in a building right next to that where BSP governor Amando Tetangco Jr. has this.

“This is very suspicious. But it is alright, isn’t it?” Kydland said in light banter that delighted everyone in the dinner Tetangco hosted for him.

Later, in a sober note, Kydland cited the importance of ensuring the independence of central banks, “having seen what happens when they’re too close.”

In the 1970s when both fiscal and monetary functions were exercised by the then Central Bank of the Philippines the integrity of the institution was severely compromised, later on forcing the offloading of more than P200 billion worth of CBP indebtedness to the books of the national government.

The impact of that one-time CB/NG closeness continues to be felt at present with each pay-down made by the CB-Board of Liquidators.

BY JUN VALLECERA