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Olivier Blanchard about the role of fear in the crisis
01/30/09
Olivier Blanchard published an excellent article about the role of fear in the current crisis in The Economist. He explains the role of uncertainty on behavior and that moving away uncertainty quickly is key to overcome the crisis. He urges governments to move away tail risks and the perception of tail risks.
The Economist: (Nearly) nothing to fear but fear itself by Olivier Blanchard, Jan. 29, 2009
"So what are policymakers to do? First and foremost, reduce uncertainty. Do so by removing tail risks, and the perception of tail risks. On the portfolio side, establish a price, or at least a floor on the price, of the troubled assets. Ring-fence them or take them off bank balance-sheets. On the consumption side, commit to do whatever it will take to avoid a Depression, from fiscal stimulus to quantitative easing. Commit to do more in the future if necessary. Above all, adopt clear policies and act decisively. Do too much rather than too little. Delays in financial packages have cost a lot already. Further rounds of debate will stoke uncertainty and make things worse."
Source: Excerpt from article linked to above
The pricing of the troubled assets when transferring them into a bad bank would, of course, be a key issue....
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