Experts Warn Financial System Risks Still High

Opening the November 5-6 research conference, IMF Managing Director Dominique Strauss-Kahn remarked on the positive effects of the timely and effective policy interventions at the global level that have helped stave off an even worse outcome to the recent global crisis.

Strauss-Kahn noted that macro-financial linkages are at the heart of the two-way interactions between the real economy and the financial system. "One of the most important lessons we painfully learned is that we need to have a much better understanding of macro-financial linkages," he said. "At the IMF, we will utilize the results of recent research on macro-financial linkages in order to help our membership devise policies that promote global financial stability and economic growth."

The Economic Forum, chaired by IMF Chief Economist Olivier Blanchard, wrapped up the 10th Jacques Polak Annual Research Conference in Washington, D.C. Since it was first launched, the research conference has become one of the major international forums for researchers and policymakers to exchange their views about issues related to the global economy.

Graceful exit

Around the world, discussions are under way on how to best move toward unwinding public sector support. Of all the measures of public support implemented thus far-fiscal and monetary policy, interventions to specific institutions, and government support programs-perhaps the one most delicate to unwind will be monetary policy.

Former Federal Reserve governor, Laurence Meyer, explained that exit for the United States will mean raising the federal funds rate; withdrawing the reserves that were put in by the various programs; and shrinking the balance sheet by selling previously purchased assets-such as, mortgage-backed securities-or letting short-term assets "run off" as the various facilities or programs are scaled back or shut down.

Meyer predicts the federal funds rate will not be increased until the middle of 2011, saying the Federal Reserve would, however, tighten earlier if another asset bubble developed. Despite having just emerged from a collapse in the housing market, Meyer believes, "we are already on bubble alert." He points to market concerns of an emerging bubble in the corporate bond and other markets, noting credit spreads have disappeared, equity prices are increasing, and housing market prices are slowly rising.

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