Policy Responses To The Financial Crisis!
If you follow Sprott Asset Management you will want to read this paper. It was referenced in their last letter.
Click Here To Read About Our Policy Responses To The Financial Crisis (pdf)
Introduction (Via BIS)
The intensification of the global financial crisis during the third stage in September–October 2008 and the subsequent sharp downturn of the world economy in the fourth stage (see Table I.1 for an overview of the stages of the crisis) led to an unprecedented response by policymakers. Central banks around the world cut policy rates aggressively, in many cases to levels near zero (Graph VI.1, top panel). Normally, this would have provided a massive stimulus to economic activity, but the dysfunctional state of the financial
system severely blunted the impact of lower interest rates. Major central banks therefore took additional measures. At the same time, a first wave of bank rescue packages unveiled in the last quarter of 2008 turned out to be insufficient to stabilise the financial system. Governments were thus subsequently forced to modify their terms and expand their scope. Towards the end of 2008, it became increasingly clear that neither monetary policy nor rescue packages were sufficient to prevent a sharp contraction of the real
economy. Governments responded by introducing sizeable fiscal stimulus to support aggregate demand.
Favorite Excerpt (Via BIS)
The exceptional deterioration in the outlook for the economy in late 2008 and early 2009 clearly called for extraordinary policy actions, which are discussed in some detail in the next three sections of this chapter. At this writing, the ability of those plans to generate a sustained recovery is an open question. The major reasons for doubt, discussed in the final section, are limited progress in addressing the underlying problems of the financial sector and the risks associated with the expansionary fiscal and monetary policies put into place during the period under review.
Additional Excerpt (Via BIS)
An open question as of this writing is whether the expansionary set of policies enacted in response to the sharp contraction in economic activity in late 2008 and early 2009 will succeed in stabilising the economy. A major cause for concern is the limited progress in addressing the underlying problems in the financial sector. The experience of the Nordic countries in the 1990s (see Box VI.B) and other historical episodes suggest that a precondition for a sustainable recovery is to force the banking system to take losses, dispose of non-performing assets, eliminate excess capacity and rebuild its capital base. These conditions are not being met. A significant risk is therefore that the current stimulus will lead only to a temporary pickup in growth, followed by protracted stagnation. Moreover, a temporary respite may make it more difficult for authorities to take the actions that are necessary, if unpopular, to restore the health of the financial system, and may thus ultimately prolong the period of slow growth.
Click Here To Read About Our Policy Responses To The Financial Crisis (pdf)
