Sunday, October 26, 2008

Exceptional policy times

This are indeed exceptional times in financial history. U.S. Government put through Congress its proposal, which leaves 700 billion U.S. dollars, has not changed markets' perception of distrust.

Even though several countries in Europe have followed the U.S. with similar measures with considerable few resources, are, apparently much more focused on reestablish people's trust on financial institutions and the financial markets. This complicated environment claims for the necessity of address base scenarios, the first question to answer is: how to avoid the financial meltdown? Thus avoiding any risk of depression. Reestablish trust. As Europe attempted, although it's still the complicated task to achieve. A coordinated action could be used.

But then again, how can trust be reestablished? Sadly, putting public resources there for buying financial institutions' deposits, temporarily. Buying toxic assets is the worst investment a government can make. There wont be any market for toxic assets as their value converge to zero. Banks should continue the writing down of bad assets they bought. Sound institutions should continue to buy hurt ones. A normal market mechanism in the way to stability.

What role does monetary policy can play amid the financial crisis? A lesser every time. Efficiency of monetary policy was always sustained on the financial market's ability to quickly spread actions through future markets, swaps, warrants and an endless list of assets. However current conditions claim for outside push of institutions,regulations on market formation can make the difference.

Monetary policy eases won't help economic growth since its channels of transmission are all broken. A public spending stimulus presents as the policy action to go with. So this means that keynesian policies should be implemented to restore economic growth, with the corresponding commitment of future fiscal surpluses to restore balance.

Regulation and public spending are the policy actions in current environment. Neither means, in any way, that market mechanisms are doomed.

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