The haircut spiral, can be seen in Chart 6. A fire sale dynamic developed, which depressed asset prices further leading to additional upward pressure on haircuts. The rapid deleveraging of the shadow banking system as the run progressed led to a sharp contraction in credit. We saw this earlier in Chart 2 with the near complete collapse in the asset-backed security market. Banks were also adversely affected by this run on securitization markets since they used these markets as well to fund many types of loans. Several banks had to bring onto their balance sheets previously off-balance sheet entities that they had used to securitize loans. This used up balance-sheet capacity making it more difficult for banks to make up for the credit contraction going on outside of the banking system. The problems in the financial system spread to the real economy. When Lehman Brothers declared bankruptcy, a money market mutual fund – the Reserve Fund – “broke the buck”. The unanticipated losses incurred by the Reserve Fund expanded the bank run to the money market mutual funds. Since these funds were significant investors in the commercial paper market, this transmitted the strains to the commercial paper market. Dollar funding pressures were also increasing for firms operating outside the United States as their ability to access dollars through the foreign exchange markets began to become strained. The  11  An overnight repo loan as compared with a longer term repo loan is the closest in nature to a demand deposit.
The challenge is to strike a balance between timely implementation and rigorous cost-benefit analyses, as well as efforts to make the most efficient use of public resources. Focusing on those projects with the greatest 2  BIS central bankers’ speeches  potential for “crowding-in” private investment should also be encouraged. Multiplier effects would provide additional lift to potential growth at no public cost, and would be the very evidence that public policy has served its function of aiding the private sector. Current supply constraints are not limited to physical capital, but extend to human capital as well. In 20 years, Thailand will be among the first ASEAN countries to enter an aging-population phase, with share of senior citizens rising from 15 to 27 percent of total population. Early symptoms have already been felt in some industries, whose capacity to produce and invest is stifled by the lack of qualified labour. Tight labour market is also indicative of labour shortage at the lower end of the skill spectrum. Market forces have failed to resolve these issues. Education policy, tax incentives, minimum wage, and migration policy all have bearings on the labour market dynamics. The long-term growth implications of these policies should be incorporated into the policymakers’ considerations. Implementing a comprehensive set of economic policies to lift potential growth, while pursuing other public policy objectives, is not an easy task. It requires a close coordination among various policy authorities. It also takes immense skills to introduce the right sequencing of policies at the right time.