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All Fall Down

Debt, Deregulation and Financial Crises

Jane D’Arista

All Fall Down traces the ways in which changes in financial structure and regulation eroded monetary control and led to historically high levels of debt relative to GDP in both developed and emerging economies. Rising stocks of debt drove the global financial system into crisis in 2008 when households, businesses, financial institutions and the public sector in some countries strained to generate sufficient income for debt service. The stagnation and fall in asset prices that followed began the process of unwinding that led to a run on the financial sector by the financial sector.
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Chapter 28: Implications of the proposed system for the conduct of policy

Jane D’Arista


The proposed system restores the ability of financial institutions to borrow and lend reserves and reduces pressure on asset sales. Unlike other financial assets and liabilities, reserves held with the Fed retain their face value and their use in transactions among financial institutions would preserve confidence. More importantly, unlike capital, their ability to be created and extinguished by the Fed would restore its ability to be an effective systemic lender of last resort. In addition, the new system would allow the Fed to constrain or stimulate flows to specific asset types or financial sectors and thus deal more effectively with asset bubbles and credit crunches. It could also buy foreign securities in repo operations to moderate the effects of excessive capital inflows. Ensuring that the Fed has these and other monetary powers would restore its ability to meet its mandate to provide the stability needed to enhance the nation’s macroeconomic performance.

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