Economic stimulus is more than spending for economic recoveryThe governmental spending - the fiscal policy - is a big part of economic stimulus. The Federal Reserve is in charge of monetary policy to provide the needed money to all markets. Our optimism and willingness to achieve the economic recovery are very important and it is part of economic stimulus too. We are in the worst financial crisis since the 1930's; this crisis precipitated a sharp downturn in the global economy also. A good analysis of why we are in this crisis and a plan for recovery are the obvious tasks for US government, the Federal Reserve and the global financial community.
Why are we in a financial crisis?The Federal Reserve has an interpretation of fundamental causes here: "This crisis is the result of the global imbalances in trade and capital flows that began in the latter half of the 1990s. In the simplest terms, these imbalances reflected a chronic lack of saving relative to investment in the United States and some other industrial countries, combined with an extraordinary increase in saving relative to investment in many emerging market nations. Like water seeking its level, saving flowed from where it was abundant to where it was deficient, with the result that the United States and some other advanced countries experienced large capital inflows for more than a decade, even as real long-term interest rates remained low." The responsibility to use the resulting capital inflows effectively fell primarily on the receiving countries, particularly the United States. The details of the story are complex, but in the shell, the risk-management systems of the private sector and government oversight of the financial sector in the United States and some other industrial countries failed to ensure that the inrush of capital was prudently invested. With other words the creative financing and political push for affordable loans replaced the sound economic policies.
How to prevent similar crisis in the future?We must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components. The strong regulation and supervision of banking institutions, although necessary for reducing systemic risk, are not sufficient by themselves to achieve this global aim. There are four key proposals from Federal Reserve to reform the financial system. That would prevent a similar crisis happening in the future.
In light of the global nature of financial institutions and markets, the reform of financial regulation and supervision should be coordinated internationally to the greatest extent possible. The economists point of view is: The financial crises will continue to occur, as they have around the world for literally hundreds of years. Even with the sorts of actions it is unrealistic to hope that financial crises can be entirely eliminated.
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