This was indeed the case during the first phase of the crisis, with lending rates declining in tandem with policy rates according to standard regularities.3 Central banks’ willingness to accommodate the increased demand for liquidity may, however, be ineffective in preventing a destructive deleveraging process, unless two additional elements are addressed.
To begin, there does appear to be general agreement on the need for financial reform. Permitting various financial businesses to be conducted jointly should provide the benefits of increased services and/or lower prices to financial customers, improved risk reduction, and cost savings for financial firms. More broadly, it should improve the efficiency and stability of the financial system that underlies our economy.