City Eye: Our deaf, dumb and blind central bankers

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The Independent Online

We are living in exciting times, and we are, as the Chinese proverb has it, cursed by them. As we skate from credit crunch to failing banks being underpinned by taxpayers' cash, to the giant hole below the water- line at Société Gé*érale, to the latest concerns about bond insurance, so the US Federal Reserve, the Bank of England and the European Central Bank (ECB) are doing a good impression of the three wise monkeys.

See No Evil, Hear No Evil, Speak No Evil are tending to the world markets, each monkey in its own distinctive fashion. The Fed saw no evil in wrapping up trailer-trash mortgage income streams and selling them as investments. Now it is engaging in some of the most aggressive experimentation in monetary policy we've seen since the 1980s.

But I fear the frantic attempts to turn things round and prevent a meltdown in the US housing market are just that – frantic, and futile. The US economy is an oil tanker (or maybe an oil-dependent tanker) – it will turn but not in time to stop some very ugly figures coming out, plus a lot of social discontent.

And that's not counting the derivatives markets, where contracts are traded on the value of these, erm, rather exciting and racy mortgage portfolios.

I for one am watching with interest what happens at Bear Sterns, a big player in that market.

The Bank of England heard no evil when the inter-bank market went dry last summer, and it doesn't want to hear the sound of crashing house prices making its way over the Atlantic. So there will probably be a gentle loosening of monetary policy this week. The anticipated quarter-point rate cut, reflected in a buoyant share market performance last week, will still be no more than a pale imitation of the flamboyant wrenching of the interest-rate joystick at the Fed.

But I think house prices are falling, and more sharply than the statistics say – specifically Nationwide's reporting of a miniscule drop last month.

The ECB remains tight-lipped about its early and dramatic injection of liquidity when the markets seized up last summer, and it is speaking no evil about SocGen. I see that young Monsieur Kerviel is attracting celebrity status in France.

Good luck to him if he attains a certain notoriety. Celebrity show trials rarely have punitive outcomes for the defendants. The system – and senior management – must shoulder a hefty chunk of the blame.

Now I must ventilate an argument that may seem anti-French but isn't. I spent seven wonderful years in Paris and that experience leads me to believe there has been an attitude of mind in France – call it an intellectual arrogance – that has set the country's banking system up for a fall.

It's changing now, as France stumbles into the 21st century, but there's long been a dislike of what's seen as the Anglo-Saxon capitalist model – the free market. Add to that the French pride in its mathematical prowess and history and you have a strong desire to be able to rise above the bovine idiocy of market forces.

Crudely put, the idea of having genius derivatives traders who can use reason to rise above the brutish game of bluff played by the Brits and the Yanks is deeply appealing to the French psyche. But they don't always rise above the markets. As the academic J K Galbraith put it: "Financial pride comes before the fall."

But it could be worse. The three wise monkeys are a westernised version of the original Japanese fable. In Japan, the monkeys are a quartet. The fourth, Do No Evil, is depicted holding his crotch. As things stand, we don't need number four. In other words, we're not totally screwed – yet.

martin@martinfdbaker.com

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