Leçons du resserrement du crédit[en] 

EuroIntelligence believe that the argument in favour of the ECB deciding to 'wait and see' before acting is "overwhelming" for three main reasons:  

• The eventual extent of the credit crisis remains "unclear" and is not "fundamentally" a subprime crisis, but a credit market bust. Neither is it a US crisis, but rather a global one.  
• The credit crisis may affect the demand for money, and if so, interest rates will "almost certainly" be reduced. However, should it remain confined to the financial sector, its effect on the real economy will be "limited". 
• There are "signs of a mild economic downturn" in the euro area.

Financial institutions in the US and Germany have been most affected so far, but "serious turbulence" should also be expected in China, argues the article – claiming that the crisis will take "months", possibly "much longer", to unwind. 

EuroIntelligence believe that interest rates may have "peaked" at 4%, but that the short-term interest corridor will be "narrow" with an "extremely cautious" ECB strategy for the way down, with rates unlikely to settle at 2% or even 3%. 

The article argues that this crisis is largely "Alan Greenspan’s legacy", and assumes that Ben Bernake will be just as "irresponsible". It recommends that Europe should not follow the policy of a "discredited" Federal Reserve. 

EuroIntelligence believe that the most important policy lessons of the crisis are: 

• Monetary policy should seek to maintain a high degree of monetary and financial stability. 
• Direct inflation targeting should be abandoned in favour of a broader base that includes an analysis of monetary and credit conditions. 
• Do not bail out every bank. Certain actors must be "penalised" to avoid a repeat of the crisis. 
• Central banks are "wrong to accept CDO tranches" as collateral as the Federal Reserve did. Extending the collateral base is "insane" as it rewards the highest risk-takers. 
• Global credit flows should be regulated, including hedge funds. Self-regulation should not be "ruled out", and a global credit register is an idea "worth studying". 
• The European banking sector should be "consolidated". 

The article concludes that there is a lot to be done, most of which "is little more than a return to time-honoured central banking practices". The crisis will be "more severe" than markets have shown thus far and the ECB is "right" to be "cautious", it adds.