It is now a year since the European Central Bank, or ECB, pumped $150 billion to thaw frozen money markets in Europe, signalling the dawn of what has come to be known as the credit crisis. The US Fed followed with its own rescue operation, which included steep reductions in US interest rates.
Let’s face it: The world economy seems to be in far better shape than we thought it would be. Growth has slowed and inflation has increased, but the financial crisis has not yet led to a similarly deep crisis in the real economy.
The markets seem to have taken a bright view because of all this. They have bounced back in recent weeks, helped by the drop in crude oil prices as well.
But there are still too many clouds on the horizon. Lenders are still skittish, as is evident from the spreads between overnight index swaps and Libor. Housing prices continue to drop. And the flood of money unleashed by the US to keep recession at bay will feed inflation.
The damage to the global economy has been less than expected. But the road to safety is still a long one.