A squirm-inducing video of former Federal Reserve governor Frederic Mishkin:
For those with an aversion to video-taped awkwardness, the clip shows Mishkin talking about his “Financial Stability in Iceland” report, written in conjunction with the Icelandic Chamber of Commerce and published in May 2006. The document is generally very favourable to the island economy and indeed, gained some notoriety when Iceland collapsed spectacularly in late 2008 and early 2009.
One particular line from the report, and brought up in the interview, is this:
The economy has already adjusted to financial liberalization, which was already completed a long time ago, while prudential regulation and supervision is generally quite strong.
We learn later in the clip, that Mishkin was paid $124,000 to co-author the report — something which does not appear to have been disclosed in the document itself, though Mishkin does say in the interview that it was “public information.” What’s more, on the copy of Mishkin’s CV presented by the interviewer, the title of the report appears to have been changed to “Financial Instability in Iceland.” To which Mishkin’s response is largely incoherent, but includes something about a typo.
Oops.
Prudential regulation was also, Mishkin says, “the mistake — turns out the prudential regulation and supervision was not strong in Iceland.” In the short clip we don’t learn why Mishkin thought strong supervision existed, exactly — just something about “faith” in the central bank and generally-held views at the time.
This is amusing because there were plenty of commentators around in early 2006, who were publicly worrying about a systemic risk — including Fitch Ratings in February. Banking analysts at JP Morgan and Merrill Lynch had also identified credit quality and funding as particular financial weaknesses.
But perhaps most tellingly of all, many analysts were beginning to question the central bank’s ability to bail-out it’s massive financial sector. From the official post-mortem on Iceland’s failed banks:
Analysts often compared the size of the Icelandic banking system to the country’s economy or the central bank’s foreign reserves. Most observers agreed that Iceland would be inclined to provide liquidity and solvency support for its banks – as it had in the past – but questioned whether the government sector could, in fact, provide sufficient support. By early 2006, the banks may have become in part victims of their own success.
Mishkin does discuss deteriorating loan quality, funding difficulties and “multiple equilibria” — the self-fulfilling prophecy of investors losing trust in banks and simply pulling out — in his report. However almost every section ends with words like “unlikely,” or sentences such as “likelihood of a financial meltdown is very low,” without — to our minds — much good reason for the optimistic conclusions.
If Mishkin did believe in Iceland’s central bank, it appears to have been a very strong faith indeed.
The interview, incidentally, appears to be a clip from Charles Ferguson’s upcoming film, Inside Job, about the financial crisis. The official trailer for that is now on YouTube.
Related links:
Ex-Fed governor Mishkin in pay for say controversy… – Jesse’s Cafe Americain
Iceland’s bank-berg, what lurked beneath (part I) - FT Alphaville
Iceland’s bank-berg, what lurked beneath (part II) - FT Alphaville
Mishkin on bubbles – The Long Room