Mostly Economics

Paul Tucker of Bank of England thinks so. In his recent speech :

The basic question is whether the authorities could lean against credit-fuelled booms by tightening capital or liquidity requirements for lenders or, as some economists have advocated, by raising the amount of collateral that borrowers have to put up.  In principle, this could be aimed at aggregate or sectoral credit conditions, and it could have a goal of making our banks more resilient. It would need to be pursued by executive agencies under clear mandates from legislators, and it would benefit greatly from  transparency.

A painful lesson for the Bank of England is that our warnings of ‘underpriced risk’ and system-wide fragilities in our Financial Stability Reports were perhaps admired by some but made no difference. And, alongside our domestic and international peers, we are not in this for plaudits! People – the markets, firms, households – take notice of our Inflation Report, MPC minutes and speeches on monetary policy not, essentially, because they might sometimes be interesting or well done, but for the simple reason that the MPC is the body that sets sterling interest rates in the real world. If the authorities were able to deploy credible macroprudential tools, their stability warnings would probably be taken more seriously in future, because they would be able to follow up words with actions.

Monetary policymakers would need to be attentive to the use of such instruments, as they would affect credit conditions. Such instruments would also help to underpin the consensus that monetary policy should focus on the path of nominal demand at the aggregate level, with macroprudential policy seeking to address over exuberance in particular sectors or in credit markets generally and the resilience of the banking system.

Hmm. that is a nice way of putting up the problem and solution. Macroprudential tools would act like a signalling device that C-Bank is serious about the fin stabilty reports.

Yes, says this paper by ECB economists.

 It tries to answer following questions:

1. Are market valuations of govt debt in line with economic rationality? It is being argued that fin markets do not work properly in fin crisis. The paper says markets are doing proper job and penalizing econs with fiscal imbalances
2. Are the recent high interest rate spreads of European debt result from large fiscal deficits/debts or a regime shift in market pricing of govt debt? The paper says it is because of high fiscal deficit/debt in European economies
3. Is there some risk aversion as well? Yes, spreads have risen because of risk aversion.

The paper also points that German bonds became a safe haven status because of the European crisis. German bonds were deemed as safe as US Treasuries.

It says European econs needs to go back to Growth ans Stability pact asap. But it is not a sufficient condition.

The paper also has a interesting historical lesson. It says markets started pricing US state governments differently after fiscal crisis of NY city in 1975. Till then all were seen as nearly same with little risks. As NY city crisis occurred, weak and strong state governments came into limelight. Same could be the case with European governments as well and markets will require stronger fiscal discipline from European govts.