## Monday, December 22, 2008

### Crisis watch, 22 December

 TED spread 1.51 S&P 500 returns +0.29% VIX 44.93 Nikkei 225 (9:02 AM IST) +1.42% US Financials index +0.86% ICICI Bank ADR +1.30% Call rate on 20th 6.55% Currency futures (9:06 AM IST) 47.4325

1. Regarding Gideon Rachman's comment on changes in China... see recent analysis at http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=22554&prog=zch

2. On "ZIRP at the Fed," it is quite touching to see you attempt to reassure yourself that the Fed will get back to normal functioning once things get better, but I'm sure it has occurred to you that this situation fundamentally challenges your worldview.

Basically, if your much-vaunted BCD Nexus breaks down in a crisis, it can't be much good, can it? If the BCD Nexus is only as strong as a market-maker of last resort, should you not be arguing for a much more balanced set of institutions that enables this public function? And if there is an imperative for a MMoLR, but this facility is bound to a tight rule, are we not in moral hazard heaven?

Rules favour the market, discretion those to whom the central banker is accountable. Greenspan was captured, hence his discretion created moral hazard.

We need central banking systems that are accountable to a democratic state, not bound to an unelected market. We need ethical central bankers who can be trusted to use their necessary discretion wisely.

I would rather bet on the balance between the ethics of an accountable central banker and the efficiency of a set of markets that are prone to collective error. We have the balance badly wrong in India, to be sure, but the solution is hardly the one-sided response that you advocate.

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