Rakesh Mohan: Global financial crisis - causes, impact, policy responses and lessons

* * * The intensification of the global financial crisis, following the bankruptcy of Lehman Brothers in September 2008, has made the current economic and financial environment a very difficult time for the world economy, the global financial system and for central banks. The fall out of the current global financial crisis could be an epoch changing one for central banks and financial regulatory systems. It is, therefore, very important that we identify the causes of the current crisis accurately so that we can then find, first, appropriate immediate crisis resolution measures and mechanisms; second, understand the differences among countries on how they are being impacted; and, finally, think of the longer term implications for monetary policy and financial regulatory mechanisms. These are all large subjects and I cannot hope to do justice to in the limited space available in one speech. A legion of both policymakers and scholars are at work analysing the causes of the crisis and findings both immediate and longer term solutions (For example, the de Larosiere Report (2009), the Turner Review (2009), the Geneva Report (2009), the Group of Thirty Report (2008) and the IMF Lessons paper (2009b)). I can only attempt some conjectures, raise issues and identify some possible directions in which we should move. What I will attempt to do is to provide my interpretation of the unfolding of the present global financial crisis; how it is affecting us; why the Indian financial sector has been able to weather the crisis relatively well; the analytics of our policy response; and, finally, some implications of its longer lasting effects.