Credit Crises and the Shortcomings of Traditional Policy Responses

Presentation at the Reserve Bank of India,Mumbai – 2 February 2012

Second International Research Conference on ‘Monetary Policy, Sovereign Debt and Financial Stability – The New Trilemma’.

The objective of this paper is to investigate the origins of the current economic and financial crisis, the worst since the Great Depression, and to draw two  policy lessons. The first of these has to do with policies to extricate ourselves from the current global crisis. Virtually all of the policies followed to date, while supportive of growth in the short term, seem likely to make our current difficulties more intractable over time. The second has to do with the policy changes required to avoid similar problems in the future. In effect, we need a new “macro financial” stability framework to do this.