Strong expansionary fiscal policies, with measures to support demand and safeguard banking and financial system have been instituted throughout the western world. The $ 800 billion dollar stimulus plans in America has been seen as bold policy initiative, although many economist are worried about its repercussion on the national dept. The proponents of this plan see it as the best way to either create jobs or prevent job losses (Romer, 2009). At the same time, most central banks around the world have rapidly lowered there interest rates.
Draghi (2009) argues that in the initial stages of a crisis, rapid disinflation should not be allowed to turn into a deflation. To keep the banks afloat, central banks have injected large quantities of money into the system; in some instances, they have bought corporate dept to keep financial institution afloat. Russell (2009) notes that reactivating financial intermediation is also essential since capital requirements cannot be satisfied by the state alone.
To achieve this goal, economists agree on three basics steps. The need to guarantee liabilities to stop bank runs; taking the banks through a stress test to identify the banks with solvency problems and ring-fencing the problematic securities or transferring them to separate entities such as bad banks followed by recapitalization (Wheelock, 2009; White, 2009, Draghi, 2009) are possible ways of unfreezing bank lending.
At the same time, economists agree that a solution to the housing crisis is necessary. Lastly economists have pointed out that there is a need to reform securitization, credit rating agencies, poor risk modeling and underwriting standards, as well as corporate governance lapses (Krugnall etal, 2008).
Some economist has also concluded that massive failure in corporate governance in some companies reflects poor incentive structures for decision, thus bank reforms should be extended to corporate remuneration practices (White, 2009; Blinder, 2008, Crotty, 2009)
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