Hence a full package of measures may need to consist of most, or all, of the following: * Coordinated interest rate cuts by all major world economies. * Guaranteeing all bank deposits, at least for individuals, but quite possibly for all depositors, for a significant period - a year or more. * Guaranteeing that no bank anywhere will be allowed to fail for at least the next several years - whether by the authorities recapitalising any failing bank, or at least providing liquidity in the event of a run. * Removing compromised assets from the balance sheets of private financial institutions by government sponsored and financed mechanisms. * Sustaining any important market that ceases to function, be it the commercial paper market, inter-bank lending, or whatever. * If necessary, making short-term loans directly to corporations - essentially buying commercial paper for cash * Easing the repayment terms on existing mortgage holders, to reduce the flood of defaults and foreclosures that will otherwise occur. * Perhaps going to even more unusual lengths, if the long end of the bond curve remains reluctant to decline, because this would prevent the property market from recovering and cause bankruptcies to increase particularly sharply.
THEWORLDTODAY.ORG NOVEMBER 2008 PAGE 12 | INDEPENDENT THINKING ON INTERNATIONAL AFFAIRS THEWORLDTODAY.ORG NOVEMBER 2008 PAGE 13 ANATOMY OF A GLOBAL FINANCIAL CRISIS John Llewellyn, MEMBER OF CHATHAM HOUSE COUNCIL, WAS SENIOR ECONOMIC POLICY ADVISOR AT LEHMAN BROTHERS It is an old public policy adage that, before you can decide where you want to go, you first have to understand where you have come from. The present crisis – no longer is this too strong a word – might be taken to imply that the matter is too urgent for the luxury of a post mortem; and certainly, it will be decades before a definitive assessment is in. But at the same time, it was the failure of the $700 billion package designed by US Treasury Secretary Henry Paulson to address even all the known key issues that led investors to judge it inadequate. Once they had reached that judgement, mistrust of the financial system spread so fast, and sentiment deteriorated so substantially, that a basically unified set of policy actions was urgently needed, across all major countries, to address all the main identified causes of the present situation. NotDancing Now i T IS TOO SOON TO TELL HOW SUCCESSFUL, AND HOW durable, the policy actions so far will prove. What has already become clear, however, is that this is no longer – if it ever was – a single-solution problem. How did matters come to this? At a minimum, the causes include the following: At the macroeconomic level, the United States elected to fight a war and to cut taxes, a dangerous duo that led to the federal government consuming way beyond its income. The US Federal Reserve, meanwhile, kept interest rates too low for too long following the dot.com collapse in 2000, further produces – it has been running a current account deficit – to the tune of over three percent of gross domestic product from 1999, and over five percent since 2004. Meanwhile, the penchant for fixed or quasi-fixed dollar pegs in China, the Middle East, and elsewhere amplified the effect of loose US monetary policy. Large consequential current account surpluses of much of the non-US world, which were
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