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LSE director discusses central banking

On Wednesday evening, Howard Davies, the director of the London School of Economics and Political Science, spoke on the fall and rise of central banking at Columbia’s World Leaders Forum.

In front of a crowd in Low Library, Davies addressed what caused the economic breakdown, and what measures could be put in place to prevent another crisis in the future.

The speech started off on a humorous note, with Davies joking that he thought he was coming to King’s College because Columbia had never asked to change its name, and he kept the tone of the evening fairly light hearted—despite his serious subject matter of central banking.

The speech focused on his new book “Banking on the Future: the Fall and Rise of Central Banking,” which he co-authored with central banker and financial regulator David Green.

Davies said that the concept of the book started before the financial meltdown, as a way to look at the way central banking had been evolving. He said the aim of the book was “to try to integrate some of the academic thinking about central banking with some of our own experiences with how central banks actually worked.”

During his speech, Davies presented many graphs and charts on increasing asset prices, the sharp rise in household debt, bank leverage, and several others to demonstrate what caused the financial crisis.

Davies also explained why people have such problems measuring financial stability. He said, unlike price stability, where the instrument people want to control is relatively well understood, financial stability is far less tangible.

“In order to make financial stability a reality, the central bank needs a robust set of indicators of financial stress,” he said, adding that this set of indicators has yet to be agreed upon.

A part of his speech was also spent talking about the situation with the Euro, and how European countries could react to the “divergence of competitiveness” that has caused some countries to be forced to bail out others.

He also outlined the three possible outcomes of the financial situation in Europe

“As always in Europe, the most favorable option is muddling through,” Davies said, which he said would mean Germans providing Greece capital so they could continue to buy German exports. But there are also two other options of either Greece defaulting or Europe splitting and having two currencies, he said, although these seem less likely in his view.

“I thought it was really interesting,” Sofia Vassilieva, CC ‘14 and a student in introductory level principles of economics, said. “Right now we are predominately studying microeconomics in class, and the talk was more about macroeconomics, which gave me insight into later in the semester.”

“It makes the things we are studying seem more tangible too because I got to see the principles applied to real world examples,” Vassilieva added.

Liwei Wang, a first year SEAS grad student studying operation research, said that he found the speech quite helpful to his understanding of banking in Europe.

“He talked predominately about the European area instead of just the Bank of England, which takes a broader view of the issues,” Wang said.

news@columbiaspectator.com

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