Central banks must 'learn lessons'

Central banks must learn the lessons of the past and “not be late” in taking decisive actions, the governor of Ireland's Central Bank Patrick Honohan said in London today.

Past financial crises, Prof Honohan said, have illustrated the importance of the timing, their potential impact and the communications around the use of "shock tactics".

The European Central Bank's creation of the SMP securities market programme in May 2010 did calm markets at a time of fears about Greek contagion.

"ECB intervention in secondary debt markets looked like a sensible and urgent action needed to nip things in the bud," he said, since there were fears that the cost of sovereign debt would spiral.

The action was prompt, he said, and "the spike of yields was removed", though it has not eliminated the cross-country variations still impeding capital markets.

The "well-known differences of opinion" which surrounded the introduction of the SMP "tended somewhat to undermine the coherence of communication" of central bankers.

"The jury is still out on whether the policy has been a lasting success, and there are of course different views on what it could have been expected to achieve long-term," he added.

The offer of three-year debt to European banks last December to buy government bonds was "well-timed", he said, adding that one must "hope" that it has the hoped-for lasting effects.

He said he believed the introduction of the so-called long-term refinancing options (LTROs) was "trouble free" because it went "with the grain" of opinion.

They corrected "the market's misapprehension that the ECB was indifferent or 'didn't get' the existential worries that were prevalent in the market", he said.

In the 1907 New York banking crisis, JP Morgan moved to save the Knickerbocker Trust Company, but it came a day too late, leading to a five-month suspension in debt repayments. In September 2008, the US government let Lehman Brothers "go", but even it moved to rescue AIG "almost immediately thereafter" the "ensuing panic- and credit crunch-induced deep global recession".

"We may take this as the first lesson of central banking announcements: there may be no second chances: missing the moment for the decisive surprise intervention may place you in a very bad position," he declared.

His remarks came during an address to the Official Monetary and Financial Institutions' forum – a body that develops links between central banks and sovereign wealth funds.

In 1971, president Richard Nixon ended the Bretton Woods regime of fixed but adjustable exchange rates, dismissing as "imaginary" fears that it would lead to devaluation, he said. But the closure of the gold window, first announced as a temporary measure, became permanent and led to a doubling of prices in the UK in the subsequent decade.