This is monetary policy nerd heaven. Jean-Claude Trichet, Mervyn King, Ben Bernanke, and Stanley Fischer reminiscing together about the 2008 global financial crisis. #FinancialCrisisReview arevie.ws/10yFinCon
.@benbernanke: "In a crisis, look for the short term potential liability."
"Short-term interest rates like LIBOR were much better indicators of the economy than house prices." @benbernanke That's would bring back memories of daily LIBOR calls and stories, eh, @GavinFinchBBG?
"Clearly what we did was very unpopular. Was it a lack of communication on our part?" — @benbernanke.
Mervyn King: "This was a run."
Capital requirements: the system was undercapitalised.
"Liquidity in lenders of last resort: that failed. We had to force liquidity onto banks. Penalty rate was time-inconsistent. Collateral failed because... There was no collateral." — Mervyn King.
"Banks fought tooth and nail against a recapitalisation."—Mervyn King.
"JC Trichet had an artist's task because the central bank wasn't fully completed and he had 17 member states to deal with."—Stan Fischer.
At the beginning of '07, there was confidential meeting with banks in Basel, and it was already clear that the risk was being underestimated, a feeling shared by the bankers themselves, JC Trichet recounts.
"A herd would form in a half day, in a day, the contagion was so rapid, and this interconnectedness [between banks] still exists." JC Trichet.
"What was amazing was the speed of the contagion. In 1929 it was much slower. We had to react very swiftly." JC Trichet.
"We had to respond extremely quickly and boldly. Had we asked the authorities, the executive branches, they would've been absolutely incapable of deciding."—JC Trichet. "The political elite could not understand how great this was."
Underscores the importance of central banks.
Underscores the importance of central banks.
"It was quite amazing that we avoided any bankruptcy in the Euro-area." JC Trichet. "But we could not afford another Lehman-type bankruptcy in Europe."
Stan Fischer underscores the speed of contagion to Asia.
"Before the crisis we knew we were in an unsustainable position," says Mervyn King. "It was a continually long period of falling interest rates. It was unsustainable."
"It was a bit humiliating for the western world to be the epicenter of the crisis." JC Trichet.
"The baton [of handling the crisis] was passed from the G7 to the G20, which was very symbolic" of how quickly it spread. — JC Trichet
"I had a visit to Brazil two weeks after Lehman, people asked me 'what happened?!'" — Ben Bernanke.
"We had to establish 17 swap lines with foreign central banks who were seeking dollars."—Ben Bernanke.
"What became apparent is that all the central banks have real trust in each other. We worked really well together." — Mervyn King.
"This would not happen with governments, but it reflects a flexibility that central banks have to act that no one anticipated." — Mervyn King.
Everyone want listen in here, by the way: arevie.ws/10yFinCon
"What we did for the banks was quite well done. Banks are all still part and parcel of the global financial system, which is still unstable today. I am not tranquil because of the possibility of having huge challenges that can be very dangerous." — JC Trichet.
"The epicenter of the crisis moved from the private sector in the US to the public sector in Europe." — JC Trichet.
"We were 15, we are now 19 in the euro-area, which is symbolic of the resilience of the euro-area." JC Trichet.
"We tried to put all our banks in a position to sustain the crisis, provided they had, of course, collateral." JC Trichet.
"In a weekend, we blocked the systemic destabilisation of the banking system." JC Trichet.
"There are no limits on the identity of recipients of Bank of England support," says Mervyn King, talking about the BoE as a lender of last resort.
"We need to focus on the elements that can generate a run," says Mervyn King. "We didn't have an accepted framework, or enough liquidity in the banking system, or political buy-in to react to a crisis before it would happen."
"There were significant differences in power between the central banks," says Bernanke. "The Fed can't lend to an investment bank, and lending to commercial banks is very restricted. In the US we don't have a lender of last resort, which is a concern."
"We do have the FDIC," says Bernanke. "It can do a lot without political buy-in."
"In the euro-area, we are less dependent on the treasury than in the UK or the US," says JC Trichet. "That's why we made many decisions at our own risk."
"How large should the role of moral hazard be in designing monetary facilities," asks Stan Fischer.
"It's a tricky balance," says Bernanke. "You don't want to overdo it and encourage market players to take more risks. But you do need tools."
"Designing it ex-ante (based on forecasts) is necessary, which isn't to say that you can't tell the banks that there is something to lose." — Mervyn King.
"FDIC appears as the model for us, the whole model, in terms of dealing with small institutions," JC Trichet.
"I experienced the full-fledged independence for the European Central Bank, protected by the treaty," says JC Trichet.
"It doesn't mean we can't cooperate or set the objectives," says Ben Bernanke.
Zvi Bodie takes the microphone to say the next crisis is coming from the collapse of the pension system.
