The initial shock on the global economy did not differ much from the one that hit in the 1930s. There were many similarities between the Great Depression and the Great Recession. Worth noting are the initial fall in manufacturing output and trade, the collapse of stock prices and credit, and the increase in bond spreads (see Eichengreen and O’Rourke, 2010). These remarkable similarities in the first months of the crisis were alarming. The questioning of the profession was also worrisome. However, the subsequent evolution of the global economy was quite different from that of the Great Depression, and it was certainly the result of good macroeconomic management. There was a failure in crisis prevention, but the policy response has been good so far. More remarkable has been the response of emerging market economies. In particular, Latin America, a region that historically magnified the global cycle, this time will perform better than the world economy’s average. The world has still many macroeconomic problems to solve before we can declare victory. Indeed the same policies that averted a collapse require careful review to avoid planting the seeds for the next crisis. 3  On this issue, Rancière et al. (2008) find that “countries that have experienced occasional financial crises have on average grown faster than countries with stable financial systems”. 4  BIS Review 84/2010  First, there is a need to think seriously about moral hazard. It is true that during the crisis this was a second order problem.
One is an apparent reluctance on the part of banks to raise fresh capital except where the market thinks that it is beyond doubt that they need to do so. Given the feedback from credit conditions to asset prices and the real economy and so potentially to banks’ future earnings, it might seem slightly odd for banks internationally to be maintaining distributions to shareholders but tightening credit availability in order to preserve resources. This has to be seen in the wider context. One possible explanation for banks holding back from raising fresh capital is that they may want to avoid giving an adverse signal about themselves. If there is a co-ordination problem, the regulatory authorities internationally should be able to tackle it, allied to ensuring prudent valuations of legacy portfolios. But another possible explanation is that, like some other market participants, bankers may believe that many legacy assets are fundamentally undervalued at present and that the markets for securitised assets will, with time, recover and reopen. On that view, banks are avoiding becoming overcapitalised on a fundamentals (or forward looking) basis, and so setting off another expansionary phase in the credit cycle, a little further down the road. The serious puzzle which that underlines is why there is a dearth of buyers for the supposedly undervalued paper. With the terms and availability of financing from banks and dealers having tightened, levered funds are hardly likely to be the US Cavalry.