ECB Bini Smaghi: Central Bk Intervention Justified, But Risky

European Central Bank Executive Board Member Lorenzo Bini Smaghi Thursday warned that central bank intervention in financial markets can increase moral hazard as well as inflation risks.


However, he added that policies like buying government bonds are sometimes necessary to stabilize the economy and financial system.

"Even Milton Friedman recognized that in some circumstances the intervention of a public authority such as a central bank could be necessary to stabilise financial markets," Bini Smaghi said in the text of a speech delivered in Rome.

Bini Smaghi further called on the euro zone to rapidly implement new crisis-fighting measures decided on at a Brussels summit in July, which aim to strengthen the currency block's bailout fund, the European Financial Stability Facility.

He said further changes could later be needed for the EFSF, just as they previously were needed to make the International Monetary Fund more effective.

Bini Smaghi also said the euro zone's separation of monetary and fiscal powers can increase instability when markets stop functioning properly.