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Financial Crisis Analysis

Angela Göpfert interviewed Ulrich Kater (als)August 14, 2007

Ulrich Kater, chief political economist at Germany's DekaBank, said the US Federal Reserve Bank is partly to blame for the American subprime mortgage crisis and its international effects.

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The effects of low-rate loans in the US have caused waves around the worldImage: AP

The European Central Bank (ECB) has added another 7.7 billion euros ($10.7 billion) in a quick tender Tuesday aimed at calming continued liquidity fears in the wake of the crisis in the US home loan sector. The Frankfurt-based central bank has injected over 200 million euros into the financial system since Thursday.

Thanks in part to a several central banks intervening worldwide, the ECB described conditions in the money market as now "close to normal."

DW-WORLD.DE spoke with Ulrich Kater, of Germany's DekaBank, who said that market participants underestimated risks involved in the US Federal Reserve Bank's low-interest-rate policies.


DW-WORLD.DE: The central banks have been massively pumping money into markets -- in unheard of amounts since the wake of the Sept. 11, 2001 terrorist attacks in the US. Are the banks living up to their responsibilities, or is this a sign of a real crisis?

Ulrich Kater
Ulrich Kater, of the DekaBankImage: DekaBank

Ulrich Kater: The central banks have a responsibility to ensure that the money markets can function. If the demand for liquidity rises to a point that money markets cannot satisfy, then it is clearly the obligation of the central banks to provide liquidity. But one can see that the amounts the banks have pumped into the markets in this very short-term liquidity intervention have continually decreased; that was already evident last week, although it was often portrayed differently. That speaks to conditions on the markets that are getting back to normal.

How much responsibility do the central banks carry in whether the financial markets continue to calm down, or whether there will be more panicked reactions?

The central banks are simply the fundament on which the money markets are based. The markets, however, are currently suffering from an intense phenomenon of the masses: Even though trust in one's business partner is the most important commodity on the markets, every market participant is under the general suspicion of not being able to live up to his promises. The central banks are there to ease fears so that so that things will settle down. I think confidence in the markets will return, especially given the basic economic data.

Isn't there a risk that investors can now rely on the banks too much?

Euro Münzen
It's up to central banks to make sure credit markets have the liquidity they needImage: AP

No. The central banks have an obligation only for short-term interventions. Investors, on the other hand, plan months, quarters and years in advance. In moments of crisis, everything always appears very dramatic, but at second glance, when the markets return to normal, the investors will also see that the basic economic figures are on track and that the global economy continues to be very dynamic.

How were things in the past? Did the central banks, especially the Federal Reserve Bank under Alan Greenspan at that time, always fulfill their obligations? Could interest rate policies in the US have been one of the reasons for the current crisis?

There were good reasons back then for lowering the interest rates so much. The Fed wanted to control the macro-economic consequences of the stock market bubble that burst in 2001, and it managed to do that. But now we are seeing the collateral damage of these interest rate policies. The sense of danger among market participants became too sedated by the "medicine" of low interest rates.

In hindsight, it probably would have been better if the central banks had started raising their interest rates a year earlier. But even central bank professionals do not have 20/20 vision for the future. The lesson that should be learned from this is not to underestimate the danger of interest rates that are too low for loans.

The lack of liquidity on the global markets has also highlighted the interest policies of the Bank of Japan. Can we expect it to raise its rates, thus intensifying the crisis?

Even last year, Japan's Central Bank policies were slower to move than expected. It is possible that, due to liquidity shortages on the markets, the Bank of Japan will postpone its plans for raising interest rates in August -- perhaps just for a month. But generally speaking, it will also be pushing for a normalization of economic policies and will have to raise interest rates.