Wall Street banks are the first to be blamed for the credit crunch. Central banks come a close second, but as the Federal Reserve's image is suffering, the European Central Bank looks as solid as a rock.
Many analysts and traders in the U.S. have cheered the Fed's rapid rate cuts and widening of collateral it accepts in exchange for liquidity for cash-strapped banks, saying that without them the crisis would be worse. The bailout of Bear Stearns also had its fans.
But the voices of those who accuse the Fed of debasing the currency and creating moral hazard are stronger and stronger.
Former World Bank chief economist Joseph Stiglitz, eternal bear Marc Faber and renowned investor Jim Rogers accused the Fed of being the source for the global credit turmoil that is crippling financial markets.
Asked what he would do if he were in Federal Reserve Chairman Ben Bernanke’s shoes, Rogers said: “I would abolish the Federal Reserve and I would resign.”
A recession may be a good way to clean up the economy, while trying to prevent one may cost more and actually worsen it, he said. Also, the market should take care of investment banks.
“If you bail out an investment bank that gets in trouble, that’s not capitalism, that’s socialism for the rich," Rogers told CNBC Europe. "That’s not the way this system is supposed to work. And why should 300 million Americans suffer so that we can bail out two or three investment banks on Wall Street?”
Problem Made Worse?
Stiglitz said some of the statements made by Fed officials over time had contributed to exacerbating the problem.
“(Former Fed Chairman Alan) Greenspan, at the very moment interest rates were at the low, advised Americans to go out (and) take these veritable rate mortgages, which have been the source of the problem, when there was a clear bubble,” Stiglitz said.
Greenspan defended his legacy, telling CNBC that it wasn't the Fed's easing that encouraged the bubble.
"What is fairly clearly the case from the data is that if adjustable rate mortgages weren't available, the purchases (of homes) still would've occurred," he said.
Not being able to identify the ‘gigantic bubble’ in the housing market and the measures taken to ease the liquidity crisis were also slammed by Faber.
“They do not solve the problems, they postpone the problems,” Faber told CNBC Europe. “I think the credit problems took 20 years to build and will take a very long time until they’re solved, and the market, at best, will move sideways.”
Arguably, action attracts criticism as well as praise, and maybe the ECB's stubbornness in not acting has kept its critics at bay, with few exceptions, among whom vocal French President Nicolas Sarkozy.
Admiration for the ECB
The ECB’s sole mandate to curb rising inflation, unlike its U.S. counterpart which also targets growth, has sometimes been questioned by economists as being too rigid. But it has also earned it admiration.
“I like the way the European central banks have been handling things. I think that they have got their eye on the inflation that, in my opinion, does exist, and they’re trying to hold back (and) keep as many arrows in their quiver as long as they can for as long as they can,” said Bob Iaccino from RWH Financial.
Credibility is key in financial markets, and a tough stance is a sure way to achieve it.
Ironically, the Fed’s recent aggressive rate-cutting has actually made the ECB more reluctant to cut because “the Fed has, to some extent, lost some of its credibility in terms of commitment to price stability”, said Barclays Capital’s David Woo.
But the ECB's glow will fade if economic conditions take a turn for the worse. Marco Annunziata from Unicredit said that the ECB is “underestimating the growth risks and risks to the financial sector.”
“We’ve already seen consumer confidence being hit, and consumption slowing, a growth slowdown is coming. High interest rates and a strong euro are making it worse,” Annunziata said.
Growth will eventually slow down and the central bank will have to react by cutting rates, but will find itself “behind the curve,” Annunziata predicted.