A lack of a coordinated global monetary policy at a time when finance and the economy are inextricably interrelated allowed the US and other major central banks to adopt lax monetary policies for too long. While the interest rate cuts fueled global economic growth in the short-term, and inflation was nowhere on the horizon, excess liquidity resulting from low interest rate and emerging markets’ mercantilist policy eventually created three asset bubbles in the real estate, stock, and commodity markets which led to the current financial crisis.  The bursting out of these bubbles was only delayed by the Fed’s intervention in the economy.

 From left to right: Ewa Balcerowicz and Marek Dabrowski 

“Whereas monetary policy is the main culprit” says Marek Dabrowski, “it should not be designated as the sole scapegoat”.  Regulation and regulatory institutions have to be looked at as an additional reason behind the crisis.  Here is the conundrum between the international/transnational nature of financial markets, as opposed to the national character of supervisory bodies, on top of a series of sectors in which financial conglomerates operate and for which there exists no consolidated financial supervision.

Emerging markets at first seemed to duck the side-effects of the crisis, but weaker demand, a fall in commodity prices, rapidly declining capital inflows (global liquidity squeeze) and troubles of financial institutions caught up with them.  To date, a number of emerging market economies, including Ukraine, Hungary, Latvia, Belarus, Kyrgyzstan, Pakistan, El Salvador and Serbia have had to ask for international support. The same happened with Iceland – one of the richest economies in the world.

Although it is too early to make final conclusions from the ongoing crisis episode, some lessons can already be drawn.

Though not a new notion, the first lesson is that monetary policy cannot be excessively pro-active and too much engaged in anti-cyclical fine-tuning. The second one is that short-term focus on inflation targeting limited to the consumer price index is of no avail without monetary authorities tracking more carefully monetary aggregates and assets markets. The third lesson is that more thoughts need to be given with respect to financial regulations, financial supervision and rating agencies. And fourth, spectacular but sporadic joint actions of central banks are not sufficient to solve the conundrum between the global nature of the financial market and the national character of monetary policy in the long-run. The IMF, which could have well served this purpose as it did under the Bretton Woods system, was downsized and weakened recently to the extent of undermining its policy coordination mission in monetary and fiscal affairs.

The current picture is finally filled with concrete threats to adopt protectionist and nationalization measures (stimulus packages, nationalization and merger of big banks, etc.) which are dubious in their effectiveness – as argued by Leszek Balcerowicz in CASE’s policy research seminar on 13 January 2009 - and historically difficult to take back once adopted.  Talks over global macro-policy coordination and supra-national supervision of financial markets have remained at the level words.

[PRESENTATION]