Freitag, 18. März 2011

Interview: Prof. Perry Mehrling, Columbia University

Perry Mehrling is a Professor of economics at Barnard College, Columbia University

In your book you argue that September 2008 the Fed moved from “lender of last resort” to “dealer of the last resort”. Was does it mean?

For nineteenth century conditions, when bank lending was the primary source of credit, Walter Bagehot pointed out the importance of a lender of last resort in times of financial stress in order to stem a possible cascade of defaults.  One of the central themes of my book is that for twenty first century conditions, when the capital market has become the primary source of credit, lending freely against good collateral may not be enough.  In September 2008 the Fed stepped in to provide additional support as money market dealer of last resort, and ultimately also as security dealer of last resort.

While the Fed talks about credit easing (Fed lending), its critics talk about quantitative easing (Fed borrowing) with emphasis on a potential inflation risk. What is your take on this debate?

I think both of them are missing the point.  The Fed expanded BOTH sides of its balance sheet at the same time.  Private borrowers and lenders who, before the crisis, had lent directly to one another, now each did business with the Fed instead; the Fed put a floor on the financial meltdown by taking the collapsing credit market onto its own balance sheet.  I would not call that credit easing, since total credit actually shrank; and I would not call it quantitative easing since larger measures of the money supply also shrank.   

To what extent will monetary policy in the post-financial crisis era be about macroeconomic management and to what extent liquidity management?

At the time I wrote the book, most economists still seemed to think one could continue on after the crisis with pre-crisis macro management, meaning so-called inflation targeting.  Liquidity management was thought to be an emergency intervention that could be put back on the shelf after the crisis.  One of the themes of my book is that these two dimensions are deeply intertwined, and I am happy to say that today my position seems to be getting some more traction.  In the history of monetary thought, the Bagehot Rule for crisis management came first, and only later did we get macroeconomic management, directed to prevent crises from happening in the first place.  I think we are today at the beginning of a road that will involve reinvention of macroeconomic management from the ground up.  Dealer of last resort is just the first step in reconstructing economic theory to engage with the fact of the modern financial system.

Thank you very much.

Perry Mehrling is a Professor of economics at Barnard College, Columbia University. His teaching specialities are Economics of Money and Banking, Monetary Theory and Policy, Financing Democracy. Prof. Mehrling is the Author of the current Book (2011) The New Lombard Street. How the Fed Became the Dealer of Last Resort.

Keine Kommentare: