Who's to blame for the global meltdown? Jacques de Larosière, former governor of the Central Bank of France, has an inkling. Speaking at the recent Eugene J. Shefferer Distinguished Lecture Series at Columbia University, cosponsored by The Maison Française and the Chazen Institute, de Larosière offered a theory: The trigger wasn’t simply a macroeconomic shock exacerbated by imprudent individual acts, as many pundits believe. Instead, he pointed a finger back to central banks, arguing that a lack of monetary policy action contributed to the magnitude of the collapse.
Citing artificially low interest rates in the United States and a global trend in financial deregulation, de Larosière argued that “the explosion of credit — which is, in essence, a monetary phenomenonon — was a major factor behind the crisis.” For example, the ratio of US private sector debt to GDP was 112 percent in 1976; by 2008 that ratio had skyrocketed to 295 percent. Moreover, from 2004 to 2008, US credit expanded between 10 and 15 percent per year while GDP grew by only 5 percent per year. Similar trends persisted in Europe as well. De Larosière argued that this accelerated credit expansion was bound to have monetary policy implications.
Yet central banks were not sufficiently alarmed by the credit growth. Said de Larosière, “It is something of a mystery, to me, at least, that central banks don’t seem to have paid much attention to it as an indicator, even though, traditionally, credit growth has been a major element in the analysis and toolbox of monetary policy markers.” Because of this neglect, in early 2009 de Larosière wrote a report to the European Commission advocating the creation of a European Systemic Risk Board to assess and collate information about financial stability. The proposed council would be led by the European Central Bank (ECB) and include representatives of the supervisory authorities and central banks of the European Union’s 27 member states. While debates resulted from the proposals, the ECB has taken no action to adopt the report’s reforms.De Larosière bluntly stated that the world must stop obsessing about the capital requirements of commercial banks, because that was not a primary cause of the financial crisis. Instead, policy-makers must focus on the quality of supervision and macroprudential surveillance, and perhaps, he said, adopt his proposal for a European System Risk Board. What remains to be seen, he said, is how quickly the world will adopt solutions to the problems exposed in the financial crisis and shore up the system’s serious vulnerabilities. De Larosiere predicted, “Without a comprehensive international macroeconomic surveillance system, imbalances will continue to flourish,” and similar global economic turmoil will ensue.