Slow Recovery Points to a Fragile Global Economy

by 27 Mar 2012

( --  At a recent conference sponsored by the United States Federal Reserve Board and the International Journal of Central Banking (IJCB), Fed Chairman Ben Bernanke's opening remarks explained an important factor of the present economic recovery: "we have much to learn about the workings and vulnerabilities of our modern, globalized financial system and its interactions with the broader economy."

Bernanke was referring to events that have been unfolding since 2007 and the Great Recession precipitated by them. The slow recovery witnessed in industrialized nations that are generally seen as economic leaders exemplifies just how delicate and complex the global financial system has become.

The conference encouraged researchers to conduct academic investigations and help public officials and economists gain a better understanding of the factors that unleashed the financial meltdown experienced a few years ago. To that extent, a research paper presented by Mark Gertler of New York University and Peter Karadi of the European Central Bank investigated the effectiveness of the Federal Reserve's massive purchase of sovereign debt.

On Gertler and Karadi's paper, the Fed's purchase of government bonds was seen as effective, but it also argued that a greater focus should have been given on purchasing the mortgage-backed securities that are thought to have played a crucial role in bringing down major Wall Street firms and American banks.

The paper helps to defend Bernanke's position, which has been criticized in various circles as misguided. The rationale behind the Fed Chairman's efforts has always been to push long-term lending interest rates as low as possible in order to encourage borrowing. The strategy seems to have worked on a macroeconomic level, as it is believed that the precarious economic situation could have been exacerbated by higher interest rates.

The Chairman concluded his opening remarks by stating that the research presented at the conference "will help shape future central bank doctrine and policy approaches and, most importantly, should help central banks better carry out their mission to promote the public welfare."


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