After Central Banks Step In
By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Thursday, 27
September 2007, 7.45 am and 7.20 pm)
After the famous ocean liner RMS Titanic struck an
iceberg and sank in April 1912, many factors were offered as
causes of the disaster.
Some of them were, the excessive speed taken by the captain,
faulty design and construction of the ship, and the shortage of
lifeboats. There is, however, another interesting factor.
Last Saturday, a tiny key to a binoculars locker on
board the Titanic was sold for 90,000 sterling pounds at an
auction. This key is special because it might have prevented
the Titanic from sinking.
Apparently, the key was in the pocket of Second
Officer David Blair, who was transferred off the Titanic a few
days before her fateful voyage. Mr Blair forgot to hand the key
over to his replacement when he left.
Binoculars were used to detect threats to ships in the
days before radar. As a result of Mr Blair’s mistake, lookouts
onboard the Titanic had to rely on their naked eyes.
An inquiry after the sinking heard that, had the
binoculars been available, the iceberg could have been spotted
earlier, and the disaster could have been avoided.
In the current sub-prime crisis, many factors have
also been offered to explain the disaster. Were central bankers
too focused on inflation? Rather than checking the evolving
financial house of cards?
Were the rating agencies the bad guys because they
told us that those sub-prime bonds were good? Going back a few
years, was Alan Greenspan too slow in raising US interest
Just as in the Titanic disaster, it’s pointless to
argue about the causes. We will never know the full answer even
after we start collecting our longevity insurance.
But one outcome is certain after central banks cut
rates. Such financial disasters will happen again because the
stage has been set to create a new bubble, to replace the old
But the US Fed really has no choice. If it had kept
rates on hold, a recession is likely to follow, maybe even a
depression. At least, lowering rates could revive the markets
and the economy.
Also, by cutting rates to rescue those reckless
investors, it encourages them to be reckless again, since they
imagine that they will always be rescued. This is what we mean
by the term "moral hazard”.
But central banking has always been about subsidizing moral
hazard ever since they were first established in the
Seventeenth century. We could avoid moral hazard altogether by
doing away with central banking.
But then we would need a monetary system based on
gold. This is not possible, unless the global financial system
collapses first. Unfortunately, we are all trapped in a system
which relies on monetary inflation to keep us going.
This means that another outcome is certain. Our money
will continue to shrink in value. As an example of how much
money has shrunk, one US dollar today can only buy what 5 cents
did in 1914, when the US Fed was first started.
As for the outcome of those reckless investors who
caused our financial disasters, more often than not, they
escaped punishment. This is because no one is certain that they
are the only ones who are responsible for the
Mr Blair, the Titanic officer who made the mistake,
also escaped punishment. He kept the locker key as a momento
and gave it to his daughter, who in turn gave it to a sailors’
association. The money raised from last Saturday’s auction will
now be used to set up scholarships in his honour.