Posted October 26, 2009
At the July 2008 Reserve Bank of Australia conference on the current ?nancial turmoil the paper by Adrian Blundell-
Wignall and Paul Atkinson explained the current ?nancial crisis as being caused at two levels: by global macro liquidity
policies and by a very poor framework for incentives of ?nancial sector agents, conditioned by bad regulations, tax systems
and governance standards. Far from acting as a second line of defense to excess liquidity, policies at this level actually
contributed to the crisis in important ways.1 The liquidity policies were like a dam over?lled with ?ooding water. Global
liquidity distortions, including interest rates at 1% in the United States and 0% in Japan, China’s ?xed exchange rate and
recycling of its international reserves, and the Sovereign Wealth Funds (SWF) investments, all helped to ?ll the dam to
over?owing. That is how the asset bubbles and excess leverage got under way. Read more (PDF)