Trichet Warns of "Behavioral Contagion" and Nontraditional Steps That He Personally Started

"Please consider Trichet warns of "behavioral contagion"

Jean-Claude Trichet, the former president of the European Central Bank, said Saturday that he is worried that controversial quantitative easing and other nontraditional steps that global central banks have taken since the financial crisis could be here to stay.

The Fed has purchased $2.3 trillion of securities since it cut interest rates to zero in December 2008 in a bid to bring down long-term interest rates and boost economic growth.

These actions have led to criticism, especially during the early days of the Republican contest for the 2012 presidential nomination, that Fed Chairman Ben Bernanke was undermining the dollar and creating conditions for a sharp rise in inflation.

Speaking to a conference of influential central bankers from around the world and leading academic experts on monetary policy, Trichet said it could still turn out that the bond-buying, asset purchases and liquidity injections by global central banks might go away after the financial system gets back on its feet.

That is the optimistic scenario, he said.

But Trichet said there was a “less flattering conjecture” that the extraordinary actions will be part of a new “permanent regime.”

Those factors may have created the permanent risk of “behavioral contagion” or a grave and immediate threat to the systemic functioning of the financial system, similar to the market meltdown in the wake of the collapse of Lehman Brothers.
“Nobody would have expected such a long time after Lehman Brothers, [central banks] would continue to have this level of expansion of our balance sheets,” he said. “We are all still in crisis.”

at http://globaleconomicanalysis.blogspot.com/2012/03/trichet-warns-of-behavioral-contagion.html