EFTA01377494.pdf

We muttons PK' be NthPI IrnottnWit (refit itghta ASSe+.4:K.SINrcpocti•dos PC/M31.0 1401../rper:;h31114“1 Focus The limits to monetary policy Central banks were seen as saviors during the financial crisis. Where does their power end? The interaction of power and markets has always been an issue Research on these models' failings soon focused on the capita€ for economists. A hundred years ago, for example, they argued markets. In the years up to 2007, credit volumes had increased that, in the long run, wages should be determined by demand sharply. The money borrowed was invested in properties and and supply and not by industrial relations. They realized that equities so that asset prices rose accordingly. Market volatility market distortions could lead to unemployment and falling was, moreover, reduced during this credit boom as high liquidity wages. However, Immediately after the financial crisis, more made investors feel sate. When the financial boom ended hopes than ever before were put on monetary policy since it had in 2007, credit defaults triggered additional selling pressure obviously managed to moderate the effects of the crisis and resulting in an increased supply of real.estate properties and end recession. But it has become more and more apparent that equities, which in its turn sent asset prices further down. money and capital markets react in a similar way to the labor The result was an additional increase in loan defaults and a market: policy intervention has its limits. deepening of the financial crisis. In 1928, the economist Ludwig von Mises postulated that excessive monetary growth led to artificially low interest rates New challenge and swelling credit' and that part of the borrowed money would be misallocated, leading to defaults. In his view, the world Analysis also revealed that the credit market behaves like a depression from 1929 to 1933 had been triggered by monetary- rubber band: During a credit boom, the volume of credit quickly policy mistakes. This train of thought was revived in the wake of expands while it quickly contracts in times of crisis. It is therefore the financial crisis that started in 2007. no surprise that the Bank for International Settlements has examined potential credit booms and asset-price bubbles in its Most countries had enjoyed a high level of employment and most recent annual report.2 And indeed, warning signals are price stability before the financial crisis. Central banks were already to be found in several countries. The central banks of therefore surprised by the Lehman default and the resulting these countries are now faced with a new challenge: They must chain reaction in the financial system. And just like during the harmonize the two targets of a balanced economy and avoiding Asian crisis of 19974998 and the New Economy crisis of 2000, a credit boom. But those targets may be corn€iwing. central banks in the advanced economies responded to the financial crisis with official rata cuts and the provision of liquidity So governments will have to take a more prominent role. for their banking systems. Despite those efforts, their economies Governments have tended to focus on the management of continued to deteriorate in 2008 and 2009. The belief that aggregate demand. So they borrowed money to increase cyclical downswings and crises could be overcome with the help economic demand. Strengthening the supply-side has proved to of monetary policy alone suffered a blow. be a more challenging task for governments in many countries. Meanwhile, many politicians have realized that only structural reforms will help to further deregulate product and labor markets Models on trjal and to promote entrepreneurship and innovation This should fosteradditional growth which would, in turn, allow a more Some central banks had to fall back on unconventional measures restrictive monetary policy so that unhealthy credit growth could such as asset-purchasing programs in order to stabilize the he reined in sooner. situation. The unexpectedness and depth of the crisis triggered intense research from 2008 onwards as to whether the central banks' economic management models were sufficient. Based on these models, central bankers had tried to align the demand and supply of goods in times of normal capacity utilization. Pivotal targets were therefore full employment and moderate Inflation. ' Source: Ludwig von Mises: Monetary Stabilization and Past performance is not indicative of future returns. Cyclical Policy: 1928 No assurance can be given that any forecast, investment Source: Bank for International Settlements: 85th Annual objectives and/or expected returns wi€l be achieved. Allocations Report; June 2015 are subject to change without notice. F = forecast. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. C.)W•nlAirtuzaa.E.INPIA:t..w 7015 CONFIDENTIAL - PURSUANT TO FED. R. GRIM. P. 6(e) DB-SDNY-0074375 CONFIDENTIAL SDNY_GM_00220559 EFTA01377494