RECENT COMMENTARY

Central banks perform two apparently quite different functions. On the one hand, they are expected to operate monetary policy in a systematic manner in order to smooth fluctuations in economic activity without jeopardizing the economy’s nominal anchor. On the other hand, in their role as the lender of last resort, they are expected to operate with the flexibility of the economy’s equivalent of the U.S. cavalry. More

The crisis revealed the Monetary Union to be dangerously incomplete, jeopardizing global economic stability. As Jean-Claude Trichet has said, EMU always needed the E as well as the M. That wasn’t so surprising given research on previous currency unions, but that earlier literature and the pre-EMU debates did not focus on the vital importance of banking union.
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Central banks are celebrated and castigated in broadly equal measure for the actions they have taken (or not taken) to stabilise the financial system and wider economy since crisis broke in 2007. For every paean of praise for their innovations in injecting liquidity, keeping markets open and supporting macroeconomic recovery, there is a chorus of reproof censuring central banks for breaching a crucial boundary between central banking and fiscal policy.
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Central banks are in the news all the time, clearing houses only occasionally and, even then, typically in the back pages of the Financial Times and Wall Street Journal. Could it be the other way round in a few decades time; or might clearing houses at least be sharing the attention of markets, media and politicians?
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In a paper published by the Hutchins Center on Fiscal and Monetary Policy at Brookings, Tucker writes, “the crisis that broke in 2007 and brought the international financial system to its knees in late 2008, threatening a repeat of the Great Depression, left the credibility of financial regulation and supervision in tatters. Until this is repaired, confidence in the financial system itself will remain fragile.”

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