According to an article from The Economist, the old- fashioned financial system can be compared to Old Maid game. The banks swapped amongst each other cards from a pack. In the end one of them was left with a lonely queen and lost, bearing all the consequences. Nowadays the rules are different, as well as the outcomes. In my essay I will examine why it has happened and what role a Central Bank plays in today’s financial system. I will focus on instruments it can use to influence monetary policy. I will look into actions which could have been undertaken at the beginning of the credit crunch and which can be undertaken now. I will also present views of different economists on what Central Banks actually have done.
The credit crunch, which has hit recently the economies of the United States and the United Kingdom in particular, is a very complex phenomenon. Surprisingly its causes were stable economic growth and low inflation. Investors undervalued the risk and the banks started to give loans to the subprime borrowers. Through the chain of causes and effects, the outcome was that banks stopped trusting one another and were no longer keen on lending money to other banks. On the other hand, none of them were sure if the other bank would lend the money when it was needed. Many have been asking for years if the introduction of innovations in the financial system will make any better. Especially the securitisation seems to be very controversial. Is the conversion of any debt into a tradable asset a way to spread risk? Or maybe it makes the economy vulnerable for any turmoil? Unfortunately, it will be the investors to find out empirically. In the optimistic scenario, the credit crunch will only tighten the monetary policy. In the pessimistic one, the lack o ...