To achieve this, they engaged in “quantitative easing” and “credit easing” policies by expanding and changing the composition of their balance sheets. The goal of these measures was to mitigate the effects of the economic slump and stabilise financial markets in the face of high uncertainty (charts 8 and 9). One may wonder – and many people do – whether these policies have gone too far. While the jury is still out on unconventional measures,4 there is no doubt that the policy of lowering short rates to virtually zero and keeping them there was fully justified. Had this policy been too expansionary, it would have translated into inflationary pressures. Yet, much to the contrary, inflation in most advanced economies has been subdued and is, in some cases, still falling even five years into the crisis. Finally, heightened uncertainty in global financial markets has increased the demand for safe assets like government bonds. At the same time, the supply of such safe assets has decreased as investors have increasingly questioned the relative security of assets that were previously considered safe, a fact that is reflected in the down-grading of several sovereign bonds. With an increased demand for and decreased supply of safe assets, their price has been bid up and their yield pushed down. The Swiss case These changes in the supply and demand for safe assets are of particular relevance in the case of Switzerland.
This is not a question that can be answered by a clear set of facts that can inform a judgement of probabilities. And of course how the financial system responds to a shock is substantially dependent on the nature of the event. In assessing this question today, there are numerous factors to consider: •  The number of hedge funds, and their total assets under management, have increased dramatically since 1998, significantly more rapidly than total financial assets. Although they still represent a relatively small share of total financial assets, they play a significant role in some market segments. Total exposure of the major bank and non-bank financial intermediaries to hedge funds as a group may be larger today, but that exposure is probably more diversified than in 1998. Market participants seem to believe that average leverage in the hedge fund community, and the extent of leverage for the more highly leveraged hedge funds, is lower than in 1998, but clearly it is difficult to assess these issues with any precision. •  On balance, the quality of risk management by counterparties to hedge funds has, we believe, improved substantially since 1998. This is important, given the gaps revealed in market practice at that point. More on this later. •  Capital in banks and in the parts of the financial system affiliated with banks has increased significantly in absolute terms - that is, the major intermediaries are significantly larger than in 1998.