Central banks can help reduce the negative effects of an excess of credit growth if they apply a monetary policy that is oriented to maintain price stability in an horizon long enough as to account for this cyclical behaviour of debt, thereby ensuring that the effects of the crisis are not so devastating for households and firms. Indeed, this should be of particular concern since we know that a monetary policy successful in containing inflation can also contribute to increase household and corporate leverage. A successful inflation fighting monetary policy manages to anchor agents' inflation expectations. In such a setting, the demand-side excesses that tend to be generated during cyclical upturns do not translate – or do so only very slowly – into inflationary pressures. Consequently, central bankers do not consider it necessary to tighten monetary policy, so that interest rates remain very low and continue to fuel the cycle and the consequent expansion of credit and debt. White (Weiβ in German), which is not only a type of wine but also the name of the chief economist of the BIS who retired last summer, has been calling in recent years for the introduction of financial stability considerations into monetary policy design and implementation. And we should acknowledge that the latest events have shown the validity of his proposals. In short, he recommends that central banks act against the build-up of financial imbalances even in the absence of inflationary pressures at the usual reference horizons.
Miguel Fernández Ordóñez: Weiß und Rot – the cycle, central bankers and supervisors Address by Mr Miguel Fernández Ordóñez, Governor of the Bank of Spain, at the “World Currency Regime – to Float or not to Float” session, 18th Frankfurt European Banking Congress, Frankfurt am Main, 20 November 2008. *  *  *  Let me begin by thanking the organisers of this edition of the Annual European Banking Congress for the opportunity to address such a distinguished audience on the subject of the cycle, central bankers and supervisors. I will be talking about “Weiβ und Rot” and not exactly about wines. *** Numerous factors have played an important role in triggering the current crisis: the subprime mortgages, the highly complex securitisation structures, the originate-to-distribute model, the over-reliance on rating agencies, risk valuation models that few could understand, etc. Many of these mistakes have been identified over the past 15 months by the authorities and by financial institutions themselves. Some regulatory reforms are already under way in the EU and overseas, while the financial entities themselves are reviewing their risk management. We can be sure that the next crisis will not be like the current one. But it is naive to believe there will be no further expansions and slowdowns. For 5,000 years now, since the Pharaoh asked Joseph about the meaning of a dream in which he saw seven fat and seven lean cows, we have known that the economy is unequivocally cyclical.