Policymakers 'had role in crisis'

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In a speech in Barcelona looking at the causes of the financial meltdown, Charles Bean said policymakers were unwittingly one of the many that set the scene for the credit boom and bust leading to the economic woes.

The deputy governor for monetary policy, who is also a member of the Bank's rate-setting Monetary Policy Committee (MPC), said he had a role "in responding to the crisis - and some might charge also a bit part in creating the conditions for it".

Mr Bean said one of the lessons from the crisis is that policymakers should take "pre-emptive action" to stop credit booms from building, although he said the policy rate set by central banks is too blunt an instrument.

He added there could be no one culprit for the events that led to financial meltdown, which he said was the product of an "underestimation of risk born of the Great Moderation, loose monetary policy in the United States and a perverse pattern of international capital flows".

Going forward, he said monetary policymakers could use tools with a more direct impact on credit availability, potentially also requiring banks to set aside more capital against riskier types of lending.

However, he stressed that booms and busts were largely an unavoidable feature of capitalist economies.

He said: "Financial booms and busts have occurred with some regularity.

"Yet we tend to treat them as pathologies that happen at other times or in other places. Their frequency suggests that we would be better advised to think of them as a central feature of capitalist economies."

Mr Bean added that the global financial credit crunch had become a defining moment in modern economics: "In all probability, the Great Panic and the Great Contraction of 2008 will join the Great Depression of the 1930s and the Great Inflation of the 1970s as discipline-defining events."