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									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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