The Role of Banks in Economic Recessions

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The role of banks in economic recessions

05.05.2009 In today’s wavering global economic context, the word `crisis` is omnipresent, taking the media by assault and infringing into the population’s daily life, although many countries haven’t even officially entered recession yet. Although recession is generally referred to as a negative Gross Domestic Product growth for a period of at least two consecutive quarters, other important economic change variables, such as current national unemployment rates, consumer confidence, capacity utilization, spending levels and business profits must be taken into account when defining a recession and its attributes. Therefore, recession can be
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Apparently, central bankers and financial supervisors are to blame, too. Although official reports have constantly been giving warnings about excess global liquidity, urging central bankers to worry about asset bubbles even when consumer-price inflation was low and banking supervisors to look beyond individual firms to the soundness of the financial system as a whole, they failed to act, allowing credit-driven excesses to expand rapidly. Therefore, central bankers are accused of failing to appreciate the scale of risks being built up in the “shadow” banking system that modern finance had created and of fuelling a credit bubble by keeping money too cheap for too long. But the criticisms are most often directed at the Federal Reserve, blamed for cutting the federal funds rate, which fuelled the housing bubble and aggravated the commodity-price surge. The interest-rate cuts in late 2007 and early 2008 may have been appropriate for a weak and financially stressed American economy. But they sent the dollar tumbling and left monetary conditions far too loose in many emerging markets that chose to link their currencies to the dollar and whose economies had long been growing beyond their sustainable pace. With all these complex problems coming along with the financial crisis, it seems that the “one tool, one target” approach which central bankers used to utilize in order to
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