The combination of these three imbalances is the source of the economic slowdown under way, above all in the United States, accompanied by strong inflationary pressures and by financial turbulence unfolding since the last summer. Overcoming the current economic phase implies some correction of the imbalances I have just mentioned. Two questions come to mind: 1. How long will the current critical economic and financial phase last? 2. What can economic policy do to speed up the correction and alleviate its costs? The reply to the first question is that probably more time will be needed than is thought to overcome the current adjustment because the imbalances that underlie this critical period go back a long way and will take time to unwind. Time will be needed, in particular, before American households start saving again in a significant way, to run down part of their debt. In the short term, this may involve slower growth for some years. Time will be needed before the financial operators regain trust in the capacity to resort to sound sources of finance so as to be able to reduce their current high appetite for liquidity. Some financial instruments will remain relatively illiquid, until the prospect of a capital gain will not become realistic gain. It will not however be possible to return to the very low levels of risk remuneration seen in recent years. Credit institutions will have to rethink their business models in order to better assess the opportunities for growth based on the availability of capital.
BIS Review 61/2008  3  was characterised not only by its deepness but also by the policy mistakes committed at the time, which introduced protectionist barriers with the aim of protecting national economies from international competition in the hope that this would succeed in better coping with the crisis. Many countries adopted measures to restrict trade with the aim of favouring local production at the cost of imports and trying to protect jobs. In June 1930 the United States introduced the Smoot-Hawley Tariff Act, which imposed disproportionately high duties on imported goods. Other countries took retaliatory measures. International trade declined (some say it contracted sharply), deepening the depression and delaying the recovery. 2 At the current juncture one the few factors supporting growth is international trade, driven in particular by emerging economies. Without this contribution, growth would be stalling completely in advanced economies. Under these conditions, thinking of curbing international trade would be a mistake in the same way as in 1929. To isolate a country from globalisation means weakening it economically. The empirical evidence shows that there is a clear relationship between a country’s degree of integration in the global economy and its economic performance over a relatively long period of time. It is the more integrated countries that compete better and develop, not those which shut themselves off from competition. The microeconomic evidence confirms the macroeconomic trends.