Fixing the Financial System


By John Lipsky in Jackson Hole

Despite tentative signs that the global recession is ending, it’s clear that a full recovery will remain inhibited until financial markets are restored to health. While financial market conditions have improved—reflecting among other things massive public sector support—key credit channels remain strained, creating a drag on growth.

One of the keys to strengthening financial markets will be to put securitization markets on a sounder footing, an issue I discuss below.

Rebuilding active and innovative financial systems will be critical for sustaining a new global expansion. After being propped up by government intervention, a recovering economy increasingly will need to rely on private capital.  As confidence and trust are restored, government guarantees will be rolled back gradually, and the crisis-driven expansion in central bank balance sheets will be unwound.

The latest financial market developments have provided positive signals. Most markets have strengthened in recent months, and some asset prices are higher today than prior to last September’s severe turmoil. Equity prices have risen notably, while investment grade corporate and sovereign emerging market debt spreads have narrowed, mainly in response to reduced risk perceptions, but in the case of corporate debt also reflecting better-than-expected economic data.

Monetary Policy in Europe—Boredom Suspended


By Ajai Chopra

Mervyn King, the Bank of England governor, once quipped that central bankers aim to keep monetary policy “boring”—a dull exercise in maintaining low and stable inflation. Recent months have seen quite the opposite.

Battling a sharp fall in inflation, central banks around the globe have slashed interest rates, often to close to zero. Several have also made headlines by adopting unconventional policies, including “quantitative easing” at the Bank of England (BoE) and “enhanced credit support” at the European Central Bank (ECB).

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