It is probably a little too early yet to know exactly what went wrong and who is to blame, but in the UK at least monetary and finance economists are starting to provide some answers.
This afternoon the LSE's Financial Markets Group hosts a half-day Financial Crisis Conference. I attach the draft agenda (PDF), which includes Charles Goodhart, Willem Buiter and the FT's Gillian Tett, among others. The web page states: "This is an open event and registration is not required. Please arrive early as places are limited".
Former MPC member Buiter has posted a copy of his powerpoint presentation 'What should the authorities have done?’ online. He summarised his arguments in a long post on his new weblog, Maveronomics, which begins thus:
The mess surrounding the rescue operation for Northern Rock demonstrated that the UK’s Tripartite arrangement for handling financial crises is not working properly.
There are three distinct sets of problems. First, the UK deposit insurance scheme is both limited in the degree to which it guarantees retail deposits and too slow in paying out on any claims submitted under the scheme.
Second, the division of labour among the Treasury, the Bank of England and the Financial Services Authority, as expressed in the Memorandum of Understanding, was disfunctional, mainly because it separated the agency in possession of the relevant information from the financial resources to act effectively upon that information.
Third, the Bank of England’s liquidity-oriented open market operations through repos, and its discount window are flawed in three ways: first, the eligible collateral is too restricted; second, the maturity of the operations (loans) is too short; and, third, the list of eligible counterparties is too restricted.
Specifically, five issues can be raised about the current set of arrangements:
(1) The UK deposit insurance arrangements did not work properly.
(2) The lender of last resort (LOLR) mechanism for dealing with individual financial institutions in distress did not work properly.
(3) The Bank of England’s Standing Lending Facility (its discount window) did not work properly.
(4) The Bank of England’s liquidity-enhancing open market operations did not work properly.
(5) The financial stability mess, and the Bank’s about face as regards the collateral requirements and the maturity of its liquidity-enhancing open market operations have created confusion about exactly what it is the Monetary Policy Committee decides on when it sets the official policy rate, or Bank Rate.