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Breaking the vicious circle

Breaking the vicious circle
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First Published: Fri, Jan 30 2009. 11 52 PM IST
Updated: Fri, Jan 30 2009. 11 52 PM IST
What’s left to be done to revive global economic growth after huge liquidity injections and fiscal stimuli fail to work? Economists say that governments should now directly attack uncertainty.
One may say that’s easier said than done as uncertainty is not some known factor that can be tackled directly. But then, maybe it can be. In the 30 January issue of The Economist, the International Monetary Fund’s chief economist, Olivier Blanchard, has argued that this can be done by removing “tail risks”. This involves establishing a floor price for troubled financial assets. It also means undoing the effects of uncertainty by recycling funds towards riskier financial assets.
This may sound bad advice: Why pump funds into a system that failed? Wouldn’t it create a massive moral hazard on the part of those who wreaked ruin in financial markets?
Somewhere, the vicious cycle of depressed financial markets generating uncertainty and that, in turn, depressing asset prices further has to be broken. Blanchard’s suggestion to cut the circle, however arbitrary the cut-off point may seem, has the potential to do the trick.
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First Published: Fri, Jan 30 2009. 11 52 PM IST