Transcript Economic Policy Reactions

Economic Policy Implications
in View of the Current Crisis
Philip Arestis
Cambridge Centre for Economic and Public Policy
Department of Land Economy
University of Cambridge
University of the Basque Country
Department of Applied Economics V
Presentation
1. Introduction: We discuss in this session
the implications of the ‘great recession’
since August 2007, essentially from the
point of view of economic policy reaction
around the world;
2. Economic Policy Reactions
3. Regulatory and Policy Implications
4. Summary and Conclusions
Economic Policy Reactions
 Early August 2007, when the subprime crisis
began to spread outside mortgage and realestate finance central banks around the world
turned their attention to enhancing the
liquidity of their banking sectors;
 A unique element of the ‘great recession’ is
the activist role played by central banks and
Treasuries around the world;
 Monetary and fiscal policies have been
employed extensively and in an unparalleled
way in the history of similar crises;
Economic Policy Reactions
 The Fed and the ECB were probably the first
to commence it. The ECB began to lend to
the EMU banks through the discount window
or fine-tuning operations and the Fed through
its repo operations;
 At the same time the Bank of England, Bank
of Canada, and the Bank of Japan
announced similar measures to address
elevated pressures in the short-term funding
markets;
Economic Policy Reactions
 In December 2007, the Fed along with the Bank of
England, Bank of Canada, the Bank of Japan, the
ECB and the Swiss National Bank introduced the
‘Term Auction Facility’ (TAF);
 This is a scheme whereby the Fed, and the other
central banks, auction term funds to depository
institutions under collateralised agreements;
 Also under this scheme the Fed allows temporary
dollar swaps to other central banks, so that the latter
can pass on to counterparties in local operations;
Economic Policy Reactions
 The crisis worsened especially in March 2008 and
subsequently;
 The rescue in the US of the Investment Bank, Bear
Stearns, by JP Morgan with funds from the Fed was
only the beginning;
 The rescue was justified on the argument that the
Bear Stearns exposure was so extensive to third
parties that a worse crisis would have developed
without the bail out;
 It was followed by the Fed/Treasury bailout and
partial nationalization of Fannie Mae and Freddie
Mac in July 2008 on the grounds that they were
crucial to the functioning of the mortgage market;
Economic Policy Reactions
 In the UK the collapse of the Northern Rock in
September 2007, which had been relatively more
reliant on interbank markets rather than on deposits
for funds and subsequently nationalized (early 2008),
was another blow to the banking system;
 Even worse was in September 2008 when the Fed
and US Treasury allowed the investment bank
Lehman Brothers to collapse in an attempt to prevent
moral hazard by discouraging the belief that all
insolvent institutions would be saved;
 The argument put forward to justify the collapse was
that Lehman Brothers was in a very bad shape and
less exposed than Bear Stearns;
Economic Policy Reactions
 The inquest of the Lehman Brothers collapse
(published on the 11th of March, 2010 and undertaken
by Anton Valukas and handed to him by a US
bankruptcy court) is actually devastating;
 Lehman Brothers was an organisation prepared to
take short cuts and huge risks to boost earnings;
 Control and accounting procedures were found totally
lacking;
 In the process the device ‘Repo 105’ was invented,
which allowed Lehman Brothers to reduce apparent
leverage;
Economic Policy Reactions
 The device allowed Lehman Brothers to pledge
assets as collateral worth 105% of the cash received
from the counterparty – to be returned after a
specified period;
 The transaction is treated as a ‘sale’ in which case
the assets pledged, more than was necessary, can
be removed from the balance sheet;
 Lehman Brothers would report its obligation to
repurchase the securities at a fraction of the full cost;
 It would then use the cash received to pay off
liabilities thereby reducing apparent leverage at
critical moments;
Economic Policy Reactions
 This was deemed legal and used widely by
Lehman Brothers, although some lawyers
question its validity under US law;
 Anton Valukas concluded that including
collateral cash and assets pledged to other
financial institutions as part of its liquidity
calculations was incorrect;
 There is now an urgent need for global
financial leaders to close this loophole;
Economic Policy Reactions
 An interesting lesson from this saga is that
institutions with bank-like characteristics
should be treated like banks and subjected to
proper regulation. Or else, they should not be
allowed to be a bank-like institution;
 The focus of a recent relevant proposal by
President Obama, the so-called ‘Volcker
Plan’, is very much along these lines;
Economic Policy Reactions
 Shortly afterwards the insurance US giant
American International Group (AIG) was
bailed out and nationalized in an attempt to
avoid the impact on insurance contracts on
securities if it were allowed to fail;
 The Lehman Brothers incident turned the
liquidity crisis into a confidence crisis;
 Causing panic in capital markets and a virtual
freeze in global trade;
Economic Policy Reactions
 There was a widespread collapse of
confidence in the banking systems in the
industrialized world;
 Especially so in the interbank market, and
with the money markets becoming
dysfunctional;
 The transmission mechanism of monetary
policy itself was thereby disrupted;
Economic Policy Reactions
 That led to an unprecedented and
synchronized downturn in business and
consumer confidence around the world; a
significant drop in aggregate demand thereby
ensued;
 A fully-fledged global credit crunch and stock
market crash emerged, as interbank lending
was effectively frozen on the fear that no
bank was safe anymore;
Economic Policy Reactions
 By early October 2008 the crisis spread to Europe
and to the emerging countries as the global interbank
market stopped functioning;
 Interestingly enough, a number of Asian and Latin
America countries managed to avoid the most
serious aspects of the crisis: their precautionary
measures after the 1997 Asian crisis helped (build up
of large foreign reserves; reduced exposure to
foreign borrowing); and tighter controls over their
banking systems, especially so in some of the Latin
American countries;
Economic Policy Reactions
 The crisis prompted significant government and
central bank interventions, both to restore confidence
in the financial system and to contain the impact of
the crisis on the real economy;
 Monetary and fiscal policy responses became very
accommodative in many countries around the globe;
 At the same time, though, it became clear that
macroeconomists and central bankers knew less
than what they had thought they did;
 Central banks responded by flooding the financial
markets with liquidity, while fiscal authorities
attempted to deal with the decline in the solvency of
the banking sector;
Economic Policy Reactions
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The UK authorities pumped equity into the banks,
guaranteeing all interbank deposits and injecting
massive liquidity into the system; the Bank of
England reduced the Bank rate six times since
October 2008 to an all time low of 0.5%;
In the UK a separate body had already been set up
in the Autumn of 2008, UK Financial Investments, to
oversee the system and to recoup the money spent
on propping up the banking system;
It also has a role in vetting the banks’ business
plans, finalizing bonus payments and has the final
say on the appointment of non-executive directors.
Economic Policy Reactions
 A new Banking Act came into force in late February
2009, giving greater powers of intervention to the
Bank of England. The purpose is for the Bank of
England to be able to give hidden support to stricken
banks for financial stability purposes;
 Most importantly under the New Banking Act there is
a new and permanent provision, the Special
Resolution Regime, which gives the Bank for the first
time the statutory objective to promote financial
stability (working with the Treasury and the FSA);
 Also the introduction of the Asset Purchase Facility
(19 January 2009), a framework that enables the
MPC of the Bank of England to initiate ‘quantitative
easing’ – implemented on the 5th of March 2009;
Economic Policy Reactions
 The European authorities also flooded the financial
markets with liquidity;
 The ECB in the EMU pursued a slightly different
approach under the banner of ‘enhanced credit
support’ or ‘liquidity enhancing’ policy;
 The latter “comprises non-standard measures that
support financing conditions and credit flows above
and beyond what could be achieved through
reductions in key ECB interest rates alone” (ECB
Monthly Bulletin, January, 2010, p. 68);
 The ECB also reluctantly reduced the repo interest
rate to 1% (May 2009);
Economic Policy Reactions
 Banks could be certain to obtain all desired
liquidity at the ECB’s weekly tenders,
provided that they had sufficient assets
eligible as collateral in Eurosystem liquidityproviding operations;
 The focus has been on banks since they are
the primary source of financing for the real
economy in the euro area;
Economic Policy Reactions
 The ECB decided that, as from 23 June 2009,
to carry out refinancing operations with a
maturity of 12 months, applying a fixed rate
tender with full allotment;
 Also, to purchase euro-denominated covered
bonds issued in the euro area;
 And to grant the European Investment Bank
the status of eligible counterparty in the
ECB’s refinancing operations;
Economic Policy Reactions
 The ECB Governing Council decided at its meeting of
early December to gradually phase out those nonstandard measures, beginning in the first quarter of
2010;
 The reason in the view of the Governing Council is
the improvement observed in the financial conditions;
 Money markets are performing better, so that:
 “there would have been an increased risk of adverse
side effects had all measures been extended in the
current circumstances” (ECB Monthly Bulletin,
January, 2010, p. 70);
Economic Policy Reactions
 As a result of these decisions:
 The 12-month operations were terminated in
December 2009;
 The six-month operations were terminated in the first
quarter of 2010;
 The number of three-month operations is reduced
also in the first quarter of 2010; and they are going
back progressively to a variable tender;
 In its March 2010 monthly meeting the ECB decided
to restrict its unlimited liquidity facility only for shortterm maturities.
Economic Policy Reactions
 An EU-wide bank regulation body, the
European Systemic Risk Council (ESRC),
was proposed;
 Comprising all ECB governing council and
other central bankers, and managed by the
ECB, while providing a critical role for the
Bank of England;
 It was designed to issue early warning signals
on risk to EU’s system of financial supervision
(to be operated from 2011);
Economic Policy Reactions
 Also in June 2009 and in the EU, a Pan-European
Regime has been proposed to regulate the financial
markets and institutions, which is to be enshrined in
European law;
 It comprises of the European Systemic Risk Council,
which will monitor financial stability, and of European
Agencies, which will police the banking, securities
and insurance sectors;
 Neither the Council nor the Agencies would have
powers to dictate fiscal action in case of financial
emergency;
 Nor can they order governments to bail out or
recapitalise banks.
Economic Policy Reactions
 We may note in passing the enormous
exposure of a number of EMU banks to
Central and Eastern European (CEE)
countries. BIS data show that 90 percent of
loans to CEE come from EMU banks (Austria,
for example, is exposed to CEE by about 80
percent of its GDP; the Netherlands by 66
percent of GDP);
 Clearly, this exposure provides risks to the
current state of the EMU!
Economic Policy Reactions
 The US Treasury introduced the Troubled Asset
Relief Programme (TARP) in October 2008, whereby
$700 billion could be used to buy ‘toxic’ securities
and thereby restore bank lending;
 The US Treasury, following the UK Treasury, planned
in this way to inject capital into the banking sector;
but it was not clear whether solvent or insolvent
banks were to be helped (supporting just insolvent
banks could not be a solution of course);
 From late 2008 to early 2009, the US Treasury
through its TARP added $250 billion cash injection;
 Also the US authorities provided insurance of senior
interbank debt and unlimited deposit insurance for
non-interest bearing deposits; the US Fed reduced
the federal bank rate to a very low 0-0.25%;
Economic Policy Reactions
 The Fed was slow to recognise the solvency
problem, which is a very serious problem in view of
the market’s uncertainty about the solvency of
individual or sectoral financial firms;
 Financial markets cannot function when basic
information about solvency of market participants is
lacking;
 Mid-February 2009, the US Senate voted for the
Obama administration’s proposal of an injection of
$787 billion, which was signed by the President on 18
February 2009;
Economic Policy Reactions
 Mid-March 2009, the US Treasury Secretary
announced their plan to neutralise £1tn of
toxic debts in the US banking system;
 This is in the form of a partnership of public
and private investment to rescue US
struggling banks;
 The Treasury would match private funds on a
dollar-for-dollar basis to buy unsellable toxic
assets that clogged up the banking system;
Economic Policy Reactions
 Private partners are able to borrow on a state-backed
guarantee usually reserved for bank accounts;
 Under the name ‘Public-Private Investment
Programme’, the plan is for the US Treasury to
purchase the troubled mortgages and securities;
 500bn will come from the Treasury’s $700 ‘Troubled
Asset Relief Programme’ (TARP), already approved
by Congress;
 Private investors are encouraged to participate with
low-interest loans and guarantees via the Fed and
the Federal Deposit Insurance Corporation – a
government agency that backs bank deposits;
Economic Policy Reactions
 In May 2009 the ‘stress test’ was introduced, an
exercise to identify undercapitalized banks, so that
the government can make sure they have enough
capital to recover;
 The metric ‘stress test’ proposed is the ratio of two
components;
 The Tangible Common Equity (TCE) is one of them,
which is the shareholder equities;
 And the bank’s Risk-Weighted Assets (RWA), that is
total assets, where different assets are given weights
according to their perceived risk; for example,
corporate loans are 100% risky assets, whereas
government bonds are given no risk weighting at all;
Economic Policy Reactions
 The TCE/RWA ratio is then utilized, where an
arbitrary 4% value is assigned to be achieved
by 2010;
 The biggest 19 banks were examined
subsequently;
 The outcome of the ‘stress test’ was that
none of them were insolvent, but 9 out of the
19 examined needed more capital;
Economic Policy Reactions
 Early June 2009, the President of the US proposed a
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package to give new powers to the Fed as well as
responsibility to secure overall financial stability;
The Fed will monitor systemic risks, thereby
becoming a systemic super-regulator;
And should do so not merely for the banks but also
for all companies big enough to threaten the financial
system;
The Fed is to have powers to control and close down
businesses in danger of collapse;
These are similar to the Governor’s of the Bank of
England proposals.
Economic Policy Reactions
 The Fed has used the term ‘credit easing’, more akin
to the Bank of England’s ‘quantitative easing’, but
different from the ECB’s ‘enhanced credit support’, or
‘liquidity enhancing’ policy, in its approach to nonstandard policymaking in the context of the recent
financial crisis;
 In the US and the UK it is financial markets, and not
merely banks, that are the primary source of external
financing for firms;
 In the EMU the focus is on the banking sector;
 The decision to purchase covered bonds outright by
the ECB is with the specific aim to support the
covered bond market, which is the major source of
support of finance for the EMU banks;
Economic Policy Reactions
 Asian nations from China to Singapore and India also
pledged more than $685 billion for similar purposes,
as part of their spending programmes;
 The measures taken after the South East Asian crisis
of 1997 have helped greatly in containing the degree
of impact upon these countries;
 Similar attempts have been made in Latin America,
where again the impact has been restrained in view
of tight controls especially on the banking sectors of
these countries.
Economic Policy Reactions
‘unorthodox’
monetary
measures
discussed so far and which have been
implemented, need more commentary;
 These measures include a number of
features as follows:
 (i) Quantitative easing, comprising of:
 Conventional
unconventional
measures:
whereby central banks purchase financial
assets, such as government securities or
gilts, that boost the money supply;
 The
Economic Policy Reactions
 Unconventional unconventional measures: in
this way central banks buy high-quality, but
illiquid corporate bonds and commercial
paper, thereby paving the way for
‘quantitative easing’
 The purpose under both measures is not
merely to increase the money supply but
also, and more importantly, to increase
liquidity and enhance trading activity in these
markets;
Economic Policy Reactions
 The Fed, under the acronym ‘credit easing’, the
Central Bank of Japan under the acronym
‘quantitative easing’ and the ECB using the terms
‘enhanced credit support’ and ‘liquidity enhancing’
policy, pursued this type of policy;
 In the UK the Bank of England announced on the 5th
of March 2009 a £150bn ‘quantitative easing’, by
buying government securities and commercial paper
(£50bn on commercial paper);
 £75bn pounds of the £150bn should be spent on
government gilts and commercial paper for this
purpose, over the April-June 2009 period;
Economic Policy Reactions
 Subsequently (May 2009) the latter was increased to
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125bn pounds (9 percent of annual GDP);
Increased further to £175bn in August 2009;
And to 200bn in November 2009;
QE was paused beginning of 2010, but could return
depending on developments;
There are doubts in terms of its effectiveness but one
advantage is clear:
QE made it easier for the Government in its fiscal
policy because it provided a ready buyer for
government debt. Without this there would have been
difficulties and may have forced the Government to
contain the degree of its fiscal initiative.
Economic Policy Reactions
 (ii) Dealing promptly and aggressively with distressed
assets;
 A related idea is the creation of so-called ‘bad banks’:
siphoning off toxic assets from financial institutions
into separate state-owned entities, thereby leaving
the privately-listed institutions free from toxic-assets
exposure;
 Sweden used a similar plan in the 1990s to bolster its
failing financial institutions; and more recently Ireland;
 (iii) Recapitalising viable institutions with public funds;
in this sense the UK Asset Protection Scheme (APS),
designed to help banks with bad debts by insuring
banks against further losses, is in the right direction.
Economic Policy Reactions
 The IMF view is that there are constraints on the
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effectiveness of orthodox monetary policy, and fiscal
policy must play a central role in supporting demand;
This should be for a prolonged period of time and be
applied across countries;
However, it should all be consistent with mediumterm sustainability;
IMF also suggests:
G-20 countries have adopted fiscal stimulus
measures amounting on average to around 0.5
percent of 2008 GDP, 1.5 percent of 2009 GDP, and
1.25 percent of 2010 GDP;
Economic Policy Reactions
 The fiscal stimulus so far consists of one third
revenue measures and two thirds expenditure
measures;
 The combined fiscal stimulus is expected to
have a considerable impact on G-20 growth
in 2009 of the order of 0.5-1.25 percentage
points;
 In 2010, further measures are needed to
achieve similar growth rates;
Economic Policy Reactions
 Fiscal deficits will no doubt increase. The IMF
estimates that for the G-20 as a whole, the
general government deficit is expected to
grow by 3.5 percent of GDP, on average, in
2009;
 IMF recognizes that the alternative of
providing no fiscal stimulus or financial sector
support would be extremely costly in terms of
the lost output.
Economic Policy Reactions
 G20 Agreement (London, 02 April, 2009):
 IMF Resources: the centrepiece of the agreement,
whereby a dramatic increase in the funding for the
IMF is recommended – from the current $250bn to
$750bn increase to enable IMF to lend to countries
facing financial difficulties;
 IMF to sell off gold reserves to establish a new $50bn
fund to help developing countries;
 Emerging countries, China for example, to be given
greater ‘say’ in the running of the IMF;
 Bankers pay: a crackdown on pay and bonuses for
bankers;
Economic Policy Reactions
 Global ‘quantitative easing’: IMF will increase the
amount each country has in Special Drawing Rights
(SDRs) by $250bn;
 Fiscal stimulus: no explicit commitment, other than to
reiterate that $5tr had already been pledged; and to
quote from the G20 communiqué, “deliver the scale
of sustained fiscal effort necessary to restore growth”;
 Clamp down tax heavens: countries that refuse to
provide full information to foreign tax authorities to
help catch potential tax evaders will face sanctions
and a list of such offshore tax heavens is to be
published;
Economic Policy Reactions
 Toxic assets: each country will dispose these
assets, either by setting up a ‘bad’ bank, or by
insuring the assets against default. No
provision for healthy ‘good’ banks mentioned;
 Hedge funds and credit derivatives is where
G20 will also impose tighter controls;
 Protectionism: a 12-month freeze on
introducing new trade barriers – no increase
in tariffs or quotas on goods imported from
overseas;
Economic Policy Reactions
 Tighten financial regulations: the current Financial
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Stability Forum, an international group of regulators,
to be turned into a more pro-active global banking
watchdog;
It will be renamed the Financial Stability Board (FSB),
and its membership will be broadened to include
developing countries, such as China, Brazil and
India;
The FSB will monitor banks and financial houses,
including credit rating agencies, on excessive risks,
and inform national regulators
FSB is to bring large hedge funds and financial
institutions into the global regulatory net;
However, FSB lacks explicit powers to damp down
excessively risk-taking institutions;
Economic Policy Reactions
 Trade finance: provide $250bn in new trade
quarantines – to be offered by the World
Bank to allow exporters to obtain credit.
 G20 Agreement (Pittsburgh, 25 September,
2009):
 Decided to designate the G-20 as the
“premier forum for our international
cooperation”;
 Thereby establishing the new ‘framework for
strong, sustainable and balanced growth’;
Economic Policy Reactions
 The latter objective is to be achieved:
 National leaders agree priorities for the world
economy in annual G20 summits;
 Countries submit reports to show how their
domestic policies match the G20 priorities;
 IMF assesses whether national plans come
together to support global objectives;
 The enforcement mechanism will be based
on peer review with the thread of ‘naming and
shaming’.
Regulatory and Policy
Implications
1. Introduction: We discuss in this session
the implications of the ‘great recession’
since August 2007, essentially from the
point of view of economic policy reaction
around the world;
2. Economic Policy Reactions
3. Regulatory and Policy Implications
4. Summary and Conclusions
Regulatory and Policy
Implications
 Economic policies seriously and aggressively
targeting aggregate demand is what is needed;
 In doing so, though, we need a functioning, but
properly regulated, banking system;
 Interestingly enough and in the US, net lending to the
private sector reduced by 13 percent of GDP; the
steepest fall over such a short time in the history of
the series;
 This sharp fall continued into 2009, 10 percent over
the year, and is expected to continue its fall in 2010,
not just in the US but elsewhere also;
Regulatory and Policy
Implications
 Why is the banking sector so reluctant to lend?
 Worries about borrower credit risk: but this means
that worries are extreme to justify the complete
cessation of lending;
 Worries about having enough liquidity of their own;
but central banks have provided ample liquidity;
 Worries of being short of funds when investment
opportunities improve;
 Could be because they posses large quantities of
mortgage backed securities (which explains why the
banking sector is distressed);
Regulatory and Policy
Implications
 The interesting question is what should policymakers
do to enable resumption of lending;
 Policymakers buy illiquid assets through auctions and
house them in a state entity, as was envisaged by the
original ‘Troubled Asset Relief Programme’ (TARP);
 Policymakers help to recapitalise entities that have a
realistic possibility of survival, and merge or close the
rest (moving the illiquid assets of those entities that
are closed down into a holding entity to be disposed
slowly over time);
 The latter means intervention in the unregulated
‘shadow’ financial system, essentially a US
phenomenon, which may be politically undesirable;
Regulatory and Policy
Implications
 Policymakers pursue a mix of the two approaches
just discussed: clean up the regulated financial sector
and buy at the same time illiquid assets;
 Focusing on helping entities that are likely to become
distressed;
 Regulators be given new powers to control lending
practices, as recently suggested by the UK’s
Chairman of the Financial Services Authority;
 Nationalise the banking sector along the Swedish
experience of the early 1990s, which apparently was
successful.
Regulatory and Policy
Implications
 The dangers with the NCM type of conduct of
monetary policy are clear: frequent changes
in interest rates can have serious effects;
 Low interest rates cause bubbles; high
interest rates work through applying
economic pressures on vulnerable social
groups;
 There are, thus, severe distributional effects;
 Regulatory and prudential controls become,
then, necessary.
Regulatory and Policy
Implications
 The obvious initial policy implication is that current
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monetary policy should be abandoned;
Monolithic concentration on price stability can lead to
economic instability;
Coordination of monetary and fiscal policies is vital;
In this coordination, financial stability and supervision
is also important;
It contains two aspects: macroprudential, monitoring
the financial system as a whole; and microprudential
regulation, monitoring individual firms;
Regulatory and Policy
Implications
 In such a policy coordination targeting asset
prices might be appropriate;
 The standard argument against asset price
targeting is that it interferes with the free
functioning of financial markets;
 Proactive monetary policy would require the
authorities to outperform market participants.
Regulatory and Policy
Implications
 Central bankers prefer to deal with the consequences
of the burst of a bubble by minimizing the damages to
the real economy, an approach that has been
adopted by all major central banks around the world;
 Especially so after Greenspan's attempt to fend the
economy from the 'new technology bubble‘;
 But the housing bubble, which precipitated the
current financial crisis, is viewed as the result of the
policies that Greenspan pursued in the first half of
2000s;
 Asset price targeting may be necessary after all;
Regulatory and Policy
Implications
 In fact, targeting net wealth of the personal
sector as a percent of disposable income,
may be more important;
 Net wealth is defined as the assets (financial
and tangible) less the liabilities of the
personal sector, which include mortgage debt
and consumer credit;
 A wealth target deals with the consequences
of the rise and fall of asset prices on the
economy and is not a target of asset prices
per se - equities or houses;
Regulatory and Policy
Implications
 Net wealth is an ideal variable to monitor (and
control) bubbles simply because it is at the heart of
the transmission mechanism of asset prices and debt
to consumption.
 Economic policy should be tightened/loosened as the
ratio of net wealth to disposable income, over a
period of time, is above/below a predetermined
threshold;
 This would allow asset price booms, but it would
prevent them from becoming bubbles that will
ultimately burst with huge adverse consequences for
the economy as a whole.
Regulatory and Policy
Implications
 Such an approach will also help regulate financial
engineering, since the central bank will monitor the
implications of financial innovations as they impact
net wealth, even if it is ignorant of them [as in the
case of Structured Investment Vehicles (SIVs)];
 Financial engineering is so complex that central
banks have a tough time in measuring, monitoring
and controlling the total liquidity in the economy.
 A net wealth target will check the consequences of
this liquidity, while not impeding the financial
engineering of the banks.
Regulatory and Policy
Implications
1. Introduction: We discuss in this session
the implications of the ‘great recession’
since August 2007, essentially from the
point of view of economic policy reaction
around the world;
2. Economic Policy Reactions
3. Regulatory and Policy Implications
4. Summary and Conclusions
Summary and Conclusions
 We have highlighted the policy reactions to the
current financial crisis;
 Most importantly, though, is that more intervention
on the policy front is desperately needed;
 Regulatory and Policy Implications have been
suggested.