Comments on: Explaining Last Week’s Credit Seize Up http://www.nakedcapitalism.com/2007/08/explaining-last-weeks-credit-seize-up.html Sun, 22 Nov 2009 18:20:39 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Anonymous http://www.nakedcapitalism.com/2007/08/explaining-last-weeks-credit-seize-up.html#comment-364 Anonymous Mon, 13 Aug 2007 19:14:00 +0000 http://www.nakedcapitalism.com/2007/08/explaining-last-weeks-credit-seize-up/#comment-364 There is a delicious irony in central bankers, who have of late been bemoaning the mispricing of risk and warning of its threats to financial stability, preventing the repricing of risk. Central bankers are trapped by the machinations of the globalization boondoggle and financial innovation, and the very thing they know financial stability requires is the thing they are now forced to prevent. I suspect, along the lines of the MacFarlane view, we are now witnessing the late stage problematic preceding a paradigm shift. In a sound financial system weak hands are revealed and allowed to fold so that rational agents in the system can act predictably by eschewing and repricing risk, but what we have now instead is officially sponsored black box dynamics where there is no sufficient differentiation between prudent and reckless courses of action. The central banks should be mitigating systemic risk, not concealing it, and they should be fostering transparency, not perpetuating opacity. Last weeks interventions, in the name of defending a short term rate target, only worked to further weaken financial stability. I suspect having central banks fight market pricing of credit is fundamentally misguided.<br/><br/>JS There is a delicious irony in central bankers, who have of late been bemoaning the mispricing of risk and warning of its threats to financial stability, preventing the repricing of risk. Central bankers are trapped by the machinations of the globalization boondoggle and financial innovation, and the very thing they know financial stability requires is the thing they are now forced to prevent. I suspect, along the lines of the MacFarlane view, we are now witnessing the late stage problematic preceding a paradigm shift. In a sound financial system weak hands are revealed and allowed to fold so that rational agents in the system can act predictably by eschewing and repricing risk, but what we have now instead is officially sponsored black box dynamics where there is no sufficient differentiation between prudent and reckless courses of action. The central banks should be mitigating systemic risk, not concealing it, and they should be fostering transparency, not perpetuating opacity. Last weeks interventions, in the name of defending a short term rate target, only worked to further weaken financial stability. I suspect having central banks fight market pricing of credit is fundamentally misguided.

JS

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