Top economists think it is up to central banks to prevent credit crunches

Some experts expressed their opinion on the role of central banks in preventing credit bubble like the one that caused the global financial crisis. An authoritative economist Andrew Smithers notes that central banks should tell lenders to vary the quantity of capital they put on their books, so their lending during periods of euphoria is controlled.

Smithers said that central bankers should monitor stock-market values, with a view to restraining exuberance when prices ceased to reflect reality. This could involve raising interest rates, as well as forcing banks to raise capital.

"You can't blame individual banks for taking advantage of the way [central banks] behaved," he stressed.

Meantime, Philipp Hildebrand, deputy chairman of Swiss National Bank, also holds to a similar view saying that banks should store capital in good years and let it run down in hard times.

Smithers stated that it was wrong of central banks to leave markets to regulate themselves. Instead, Mr. Smithers believes two measures are available to them to illustrate the sanity, or otherwise, of investors.

One of his measures of that sanity, known as the q-ratio, relates the replacement cost of corporate assets with market values. The other is cyclically adjusted multiples, which compare earnings to prices over rolling 10-year periods.

"The market can rotate in an unpredictable way, but it does rotate around fair value," he said. "If values get out of whack, we should all be concerned." And at such moments, he says, the central bank should act before a bubble forms and pops.

"We've got ourselves into a position where central banks have cut interest rates to nearly zero, and lost control of policy," he said. "In that kind of position, it is easy to go into deflationary or inflationary conditions."