The Evolving Postcrisis World

A crisis provides an opportunity to examine how an economy works under pathological conditions. What are the lessons? Markets work well most of the time. That said, the global financial crisis has weakened faith in the market’s self-equilibrating qualities. Fiscal policy works well to offset weakening activity. The main focus is now on the timing of exit and unwinding the fiscal debt legacy. Monetary policy also works, and sharp falls in policy interest rates allow financial institutions to restore confidence in their balance sheets. The superior fundamental position of Asian countries made it feasible to push policy in a supportive direction. Globalization might have suffered a setback, but it is minor and temporary. Bagehot’s century-old dictum on how the authorities should handle a banking crisis—”lend freely”—still seems correct. International cooperation, even embryonic policy coordination, took some tentative but important steps forward, largely through the G20.