Monetary policies in times of turmoil

The current weakness in the US financial markets has recently been magnified overseas as panic spread to foreign investors with exposure to U.S. asset backed debt. The recent sell off in global stocks was in general liquidity-driven and a consequence of mispriced risks in the US sub-prime, derivatives and international currency markets. Initially many investors, particularly those using leverage, were forced to meet margin calls by selling assets to raise cash. Since the assets causing the problems had little, if any, value, they were forced to sell other assets instead, causing prices to fall sharply. In addition, the increased risk aversion that followed led to de-leveraging of other speculative positions like for instance the yen carry trades; speculative-grade corporate bond issuance ground to a halt; and the asset-backed commercial paper market seized up, even for high-quality investors. Read More →