The result was that some bank conduits and buyers of securitized products such as SIVs became distressed and failed as mark-tomarket losses increased. In the post-Lehman bankruptcy world – when liquidity was paramount – securitized products were very difficult to trade, in part, because they were very difficult to value. 2  BIS Review 69/2009  The cessation of new asset-backed securitizations has been problematic because banks have not had the capacity to keep credit flowing freely. This is especially true given that bank balance sheets were already under strain – bank capital has been depleted by credit losses and bank balance sheet capacity has been strained by an inability of banks to securitize new loan originations and by the need for banks to honor their off-balance sheet obligations. For all these reasons, the Federal Reserve determined that it was important to augment the balance sheet capacity of the financial system by supporting the ABS market. This was the purpose of the TALF. By providing non-recourse, term financing for new AAA-rated consumer asset-backed securities to investors, the TALF essentially provides the balance sheet capacity necessary to facilitate the continued flow of credit to households and businesses. The TALF offers three attributes that the private sector has had difficulty providing during this time of financial and economic distress: 1) leverage to purchase highly-rated, low-risk assets, 2) term financing and 3) protection against very adverse economic outcomes.
To put this in context, in the preceding 3 decades stretching back to the 1960s, annual GDP growth deviated from its 10 year average by more than 1 percentage point about half of the time (about 20 quarters in each 10 year period). 2  BIS Review 80/2008  employers and employees are less likely to adjust their prices and wages to a surprise movement in inflation. In other words, their expectation of inflation in the medium-term remains low, stable and anchored at the target. And that has helped to contribute not only to the stability of inflation, but output as well. Reforms to both the labour market and monetary policy have undoubtedly played an important role in the reduction in output volatility and emergence of a stable, low inflation environment. But there was a third factor at play that was probably also quite fundamental. Over the first decade of the MPC the economic cycles in the rest of the world were generally moderate, although not without excitement. And there is good evidence to suggest that the integration of emerging economies, such as China, into the global economy was beneficial to countries like the UK. The share of Chinese goods in total UK goods imports has almost tripled in money terms over the past fifteen years to around 8 per cent, and it’s likely that much of the content of imports from elsewhere originated in China. This rising share of Chinese imports has reduced manufactured imported goods prices relative to other prices and wages.