WASHINGTON, DC – In the maelstrom of events and news that characterize the current global crisis, it is often difficult to keep a clear head and a sense of what is really going on. But when one takes a step back (something easier to do on days when markets are closed), the picture becomes clearer, and so do the required policies.
Let me first set the scene by making three observations on where we are today. First, in the advanced countries, we have probably seen the worst of the financial crisis. There are still land mines, from unknowable credit default swap (CDS) positions to hidden losses on balance sheets, but the worst days of frozen money markets and obscene risk spreads are probably over.
Second, and unfortunately, the financial crisis has moved to emerging countries. In crossing borders, the sharp portfolio reallocations and the rush to safer assets are creating not only financial but also exchange-rate crises. Add to this the drop in output in advanced countries, and you can see how emerging countries now suffer from both higher credit costs and decreased export demand.
Third, in the advanced economies, the hit to wealth, and even more so the specter of another Great Depression, has led people and firms to curtail spending sharply. Not only have they revised their spending plans, but, in many cases, they have delayed purchases, waiting for the uncertainty to clear. The result has been a sharp drop in output and employment, reinforcing fears about the future, and further decreasing spending.