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.
By John Lipsky
Every year at this time, senior Federal Reserve officials and central bank heads from around the world gather in Jackson Hole, Wyoming—together with leading economists from universities and the private sector—to hear presentations on key policy topics and to discuss the challenges facing the global economy. The spectacularly beautiful setting at the foot of the Grand Teton mountains provides calm and perspective.
Last year’s gathering took place on the eve of historic financial turmoil and subsequent economic downturn. One year later, it is clear that progress is being made to overcome the crisis, but also that many fundamental changes will flow from the past year’s challenges, even though the exact nature and course of these changes remain far from certain. The mountains’ grandeur remains unaltered, of course, providing inspiration while insinuating an appropriate sense of humility.
The story of the past year is well known: Faced with the very real possibility of a global financial meltdown, and the reality of the sharpest global economic downturn of the post-World War II period, policymakers around the world responded with a series of unprecedented actions—including massive monetary and fiscal stimulus, plus new governance initiatives. One year later, the signs are clear—if still tentative—of renewed growth, although opinions are divided regarding how effective specific policy actions have been, or about how soon the global economy will regain the pre-crisis level of output, or reestablish pre-crisis trend growth rates.
By Ajai Chopra
Europe’s economic and financial integration has been a tremendous success, but the region is now under great stress. As the global economic crisis has shown, the flipside of Europe’s successful integration has been a synchronized economic downturn and complex financial spillovers between countries.
For those of us involved in providing financing and policy advice to emerging Europe, it quickly became apparent that the official sector would be more effective if it managed to secure the cooperation of private western banks operating in emerging market countries in central, eastern, and southern Europe (CESE).
During the past decade, western banks played an important role in developing the financial sector in emerging Europe, through ownership of banks and through direct cross-border lending to financial institutions and firms. But over time, CESE countries accumulated high levels of debt to western banks. Although these banks have a declared long-term interest in the region, they came under intense pressure to deleverage when the global financial crisis struck because of the weak financial conditions in both home and host countries and the diminishing appetite for risk at the global level. Uncertainty about other banks’ strategies further exacerbated the pressure on individual banks to scale back lending to the region.
By Ajai Chopra
Resolving any financial crisis is no easy matter. Resolving the ongoing international crisis—with many institutions, countries, and regulators involved—is unusually challenging, both intellectually and in terms of practical policymaking.
Progress has been made thanks to the slew of measures adopted by global policymakers. But a stabilized patient is not a cured patient, particularly when stabilization largely reflects significant shifts of risk from the private financial sector to the public sector. And the early reappearance of practices thought to have played a part in fueling the crisis—sizeable bonuses, for example—is troubling.