BRUSSELS – Interest rates are now close to zero throughout the developed world (the United States, Europe, and Japan). But the global economy is slowing down, and financial markets went into a tailspin during the summer. This suggests that the problem is more profound than one of insufficient monetary stimulus.
The heart of any economy is the mechanism by which funds are channeled from savers to investors. In normal times, capital markets perform this function smoothly; but these markets break down from time to time, owing to sudden large changes in perceptions about the riskiness of important asset classes.