Wanted: Central bank with new answer to old problem

By Brian Love - Analysis

PARIS (Reuters) - Decades pass but the story remains the same -- financial markets lurch from boom to bust, central banks rush in to avert disaster and their rescue operation sets the scene for yet another boom-bust sequel.

Governments, meanwhile, are asking how the present mess came to be despite all their endeavors to render the global financial system less accident-prone since the collapse of the LTCM hedge fund in 1998 or the world stock market crash of 1987.

Nearly 10 years after the demise of LTCM, central banks are racing to the rescue again, flooding money markets with emergency loans as calls mounts for them to go all the way down the road they took in '98 and '87, by cutting official interest rates.

The trouble that snowballed out of the U.S. mortgage market, compounded by a frenetic level of debt securitization over the past five years, has fuelled fears of damage to the banking system, sparking this year's crisis.

Has the world learned anything since LTCM went belly-up in late 1998?

"Not really," says Willem Buiter, economics professor at London School of Economics and a former member of the policy committee of the British central bank.

The risk now is that the Federal Reserve feels forced to cut its main interest rate to prevent financial turmoil hurting the economy or that the European Central Bank chooses to take its foot off the brake in the euro zone too fast.

Past experience suggests central banks overreacted, cutting rates more than was needed, says Dominic White, an economist at Dutch investment bank ABN Amro.