Financial markets and the post-crisis scenario

• Published in: International review of economics 2009, Vol.56 (3), p.215-225
• Main Authors: Bagella, Michele, Ciciretti, Rocco
• Format: Article
• Language: English
• Subjects: Asset backed securities; Balance sheets; Banking; Capital losses; Central banks; Economic crisis; Economic Policy; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Federal Reserve monetary policy; History of Economic Thought/Methodology; Interest rates; Law and Economics; Liquidity; Quality of Life Research; Securities markets; Social Policy; Stock exchanges; Studies; Subprime lending; Trends
• ISSN: 1865-1704; 1863-4613
• DOI: 10.1007/s12232-009-0072-y

Starting from August 2007, the FED intervened by injecting liquidity in the inter-banking market and reducing interest rates. Day after day, the financial markets register negative trends and rallies. This is not due to events which are particularly related to the market itself. This appeared in the days when there were government interventions, when everybody expected a positive sign in the financial market but a negative sign occurred. Sometimes, this is due to the intensity of actions taken by the governments. The markets always expect appropriate interventions (in terms of intensity). Looking at these market reactions (in unexpected signs) after each government action, we can suppose that policy makers underestimate the intensity of this crisis. The capacity of making enforcement on the system should avoid underlining the side of governance rules which will never be precise. Being able to count on an active control of the market dealers, broadly speaking is a way of giving active confidence to individual/institutional agents who decide the allocations of saving in the financial market. There is no such confidence at the moment, if one focuses only on the definitions of new rules. If one starts from existing rules and does continuous monitoring so that they are applied adequately at crucial moments, then one could reduce the possibility of facing new exceeding volatilities of banking securities in the stock market. This work is focused on understanding how governance as well as central banks’ policy impact on the crisis, as well as possible future scenarios.