Central banks had to react to unforeseen developments with very little recent historical experience to guide their decisions. Overall, the response to the crisis was largely a “learning-by-doing” process. With hindsight, however, there appears to be an underlying logic to all these interventions. First, after the bursting of the credit bubble, all advanced economies entered a phase of deleveraging, in an attempt to reverse and absorb the excesses of the pre-crisis period. Deleveraging, which is basically a balance sheet contraction, has affected almost all sectors in our economies: banks, obviously, households (in the United States and United Kingdom) and, now, governments. Deleveraging is unavoidable and necessary. Both borrowers and lenders need to re-establish sustainable debt positions in order to restart credit and restore the normal financing of the economy in the long run. But deleveraging creates huge difficulties in the short run. It may be extremely deflationary as it involves both a contraction in credit and money and an increase in savings rates. To some extent, central banks have counteracted this development. By expanding their balance sheets, they increased their leverage when other economic agents (with the exception of large corporates) were all deleveraging simultaneously. Second, the uncertainty created by the crisis has led to an increase in the demand for safe and liquid assets. At the same time, the supply of these assets has been significantly reduced, especially in Europe, since credit risk has appeared on government debt.
In the euro area, fiscal consolidation must continue and crisis management mechanisms must be made operational. In other countries, such as the United States and Japan, future fiscal uncertainties must be eliminated. Finally, stable regulatory regimes, first and foremost in the financial sector, are also essential. For its part, monetary policy must be predicable, not in the sense that each and every move of the monetary authorities be precisely anticipated, but rather, that their objectives be clear and their actions fully understandable by economic agents. Strong, independent and responsible central banks are, more than ever, necessary to price and financial stability. 4  BIS central bankers’ speeches