Development and Finance from issue 2009/2

Géza Kozma

Resolving the Credit Crisis

- Abstract -

JEL G-01

The economic crisis consists of an unexpected upsetting of the balance between demand for and supply of liquidity, which brings about a significant acceleration in financial market processes. This acceleration always stems from a disturbance in some sector of the real economy or the financial markets, and the point when this happened can be identified retrospectively. The disturbance, however, is not the same as the crisis; the crisis is constituted by the acceleration and its spread. For this reason Greenspan could not have prevented the crisis by changing the interest rate, in fact, this is probably precisely why he continued with his cheap money policy because he feared that raising interest rates would interfere with what are considered normal economic processes, and that this in itself would trigger the crisis. It would have been reasonable to tighten up regulation in parts of the market, but it is by no means certain that before the acceleration there would have been support for efforts to this end amongst those affected, and the proposal could have backfired.

Géza Kozma, CSc in economics

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