FT.com / In depth - Central banks’ dilemma over information deficit

FT.com / In depth - Central banks’ dilemma over information deficit: "Central banks’ dilemma over information deficit By Krishna Guha and Eoin Callan in Washington Published: August 16 2007 20:32 | Last updated: August 16 2007 20:32 At the heart of the turmoil in financial markets, central bankers believe, is an information problem that has magnified the consequences of what appears to be a credit problem in securities backed by US subprime mortgages. Underlying credit quality remains good in most of the US economy – including the prime mortgage market. Policymakers believe that this should limit the extent of any pull-back from lending. They believe that markets are paralysed by lack of information as to the ultimate size and distribution of losses – which has contributed to a sudden drying up of liquidity in the three-month interbank and commercial paper markets. The information problem has two components. First, investors do not know where the losses from subprime – which Ben Bernanke, the US Federal Reserve chairman, suggested last month could be up to $100bn – lie. Second, they have lost confidence in their ability to value complex structured credit products that include some exposure to subprime bundled up with exposure to other underlying assets. “Investors are facing enormous uncertainty on the likely size and distribution of financial"