Tuesday, November 25, 2008

[Latest Endogenous Liquidity Index: -63.9%; Latest Global Dollar Liquidity measure: +40.1%]

Interesting piece by John Muellbauer in today's Financial Times (*). Mr. Muellbauer's idea is to globalize the 1997-1998 unorthodox HKMA solution to the financial crisis. Back then, the Hong Kong Monetary Authority successfully intervened in asset markets, buying stocks from short-sellers in what turned out to be a very profitable trade. Now, says the author, the HKMA solution has to be global in scope: "Since no country is exempt, international co-ordination is needed and made easier because of the obvious common interest". Mr. Muellbauer is adamant about the nature of his plan: it is "reversible, self-financing and immediately applicable", as was the case in Hong Kong ten years back.

International co-ordination will avoid the policy being seen as a sign of weakness or panic at the individual country level, with costs to currencies and government bond markets. The incentive structure for central banks to join such concerted action is less likely to create free rider problems than is the case for fiscal policy. Any central bank considering such action has an incentive not to delay since the potential profitability is likely to be lower for late participants, given that asset prices will generally be bid up in the process.

(*) John Muellbauer: "The world’s central banks must buy assets", Financial Times.