To avoid a cascade of counterparty defaults, governments offered generous financial guarantees and injected fresh capital into the system. Central banks increased their lending to replace the withdrawal of private lending – in interbank transactions and, sometimes, in the broader market for capital. This concerted intervention very much attenuated the downward part of the cycle and blocked channels of financial contagion.
In short, it provided catastrophe insurance. There is no doubt that macroeconomic policy-makers’ interventions have had a stabilising effect. Market compensation for risk has gradually returned to more normal levels. The freefall of the economy has been halted and turned around. The financial crisis has not precipitated the extreme spiral of falling prices, rising debt burdens and chain bankruptcies that some economists had feared.