In the days following the fall of Lehman Brothers in autumn 2008, confidence in the global economy was in freefall. This book, first published as an eBook only a few weeks after the event, outlines the fears of some of the world’s leading economists that the unfolding financial market meltdown had Rescuing the potential to trigger a massive and prolonged recession that would destroy hundreds of millions of jobs worldwide and wipe out the savings of countless households – with the most vulnerable being hit hardest. Our Jobs They were not wrong.

The authors call for policymakers to embark on forceful and coordinated action to avoid the next Great Depression. While their essays differ on many points, a clear consensus emerges on the need and Savings to act swiftly and together.

The authors are: Alberto Alesina, Michael Burda, Charles Calomiris, Roger Craine, Stijn Claessens, J Bradford DeLong, Douglas Diamond, Barry Eichengreen, Daniel Gros, Luigi Guiso, Anil K Kashyap, What G7/8 Leaders Can Marco Pagano, Avinash Persaud, Richard Portes, Raghuram G Rajan, Guido Tabellini, Angel Ubide, Charles Wyplosz and Klaus Zimmermann. Do to Solve the Global Credit Crisis

Edited by Barry Eichengreen and Richard Baldwin

ISBN 978-1-907142-26-0

Centre for Economic Policy Research 77 Bastwick Street, London EC1V 3PZ Tel: +44 (0)20 7183 8801 Fax: +44 (0)20 7183 8820 A VoxEU.org Book 9 781907 142260 Email: [email protected] www.cepr.org

Rescuing our jobs and savings: What G7/8 leaders can do to solve the global credit crisis

A VoxEU.org publication Centre for Economic Policy Research (CEPR)

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A VoxEU.org publication

Edited by Barry Eichengreen and Richard Baldwin Centre for Economic Policy Research (CEPR)

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Introduction 1 The G7/8 finance ministers meeting: An opportunity 1 Remarkable consensus: Stabilise the banking system 1 Stabilising the banking system: options 1

The essays: What G7/8 leaders can do to solve the global credit crisis

Coordinating international responses to the crisis 5 Klaus F. Zimmermann

Calming the panic 7 Alberto Alesina and Guido Tabellini

How to save the European banking system 9 Daniel Gros

What is to be done – and by whom? Five separate Intiatives 11 Avinash Persaud

What next? 13 Douglas W. Diamond, Anil K Kashyap, Raghuram G. Rajan

A strategy emerges: The right policies to deal with the crisis 15 Richard Portes

The need for a comprehensive and global solution 17 Stijn Claessens

The content of coordination 19 Barry Eichengreen

Why government responses need to be comprehensive and coordinated 21 Charles Wyplosz

A proposal to tackle the crisis in Europe 23 Luigi Guiso and Marco Pagano Governments should buy straightpreferred stock in their banks 25 Charles Calomiris

An efficient rescue plan 27 Roger Craine

The wrong financial crisis 29 J. Bradford DeLong

What Europe should do in the shadow of the financial meltdown 31 Michael Burda

No more dithering 33 Angel Ubide Introduction

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The G7/8 finance ministers meeting: An opportunity

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2 What G7/8 Leaders Can Do To Solve The Global Credit Crisis mofj^ofivªqlªRPª^kaªBrolmb^kªb`lkljfpqpª^pªqefpªfpªtebobªqebª`ofpfpªfpª`roobkqivª_rok* fkdªjlpqªpqolkdiv+ªTbªelmbªqe^qªqebobªtfiiª_bª>pf^k)ªI^qfkª>jbof`^kª^kaª>cof`^kª^k^* ildrbpªqlªqefpªfkfqf^qfsb)ª^kaªpllkboªo^qeboªqe^kªi^qbo +ª Qebªmolar`qflkªlcªqebª_llhªt^pªlod^kfpbaª_vª@BMOÖpª`^m^_ibªpq^ccª^kaªQ b^jªSlu %bpmb`f^iiv)ª>kfiªPe^ja^p^kf)ªGlk^qe^kªAfkdbi)ªMfboob*IlrfpªS¤wfk^ª^kaªJbi^kfb P^t^ovkªrkaboªqebªdrfa^k`bªlcª@BMOÖpª@efbcªBub`rqfsbªLccf`bo )ªPqbmebkªVbl&+ªTbª^ob pq^ddbobaª_vªqebfoªpmbbaª^kaªabuqbofqvª^ka)ª^_lsbª^ii)ªdo^qbcriªcloªqebfoªbccloqp+ª

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3

Coordinating international responses to the crisis

Klaus F. Zimmermann Bonn University, IZA, DIW and CEPR

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About the Author

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6 Calming the panic

Alberto Alesina and Guido Tabellini Harvard and CEPR; Bocconi University and CEPR

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About the Authors

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8 How to save the European banking system

Daniel Gros Director, Centre for European Policy Studies (CEPS), Brussels

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9 VOX Research-based policy analysis and commentary from leading economists

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About the Author

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10 What is to be done - and by whom? Five separate initiatives

Avinash Persaud Chairman, Intelligence Capital

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Looking ahead to the next crisis

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References Dllae^oq)ª@e^oibpª^kaª> sfk^peªMbop^raª%/--5&+ª"Eltªqlª^slfaªqebªkbuqª`o^pe)" Cfk^k`f^i Qfjbp)ª0-ªG^kr^ov+

About the Author

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12 What next?

Douglas W Diamond, Anil K Kashyap and Raghuram G Rajan University of Chicago Graduate School of Business

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13 VOX Research-based policy analysis and commentary from leading economists

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About the Authors

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14 A strategy emerges: The right policies to deal with the crisis

Richard Portes London Business School and President of CEPR

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The UK Package: The right policies and hopefully not too late

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15 VOX Research-based policy analysis and commentary from leading economists

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About the Author

Of`e^oa Mloqbp fp Molcbpplo lc B`lkljf`p ^q Ilkalk ?rpfkbpp P`elli ^ka Clrkabo ^ka Mobpfabkq lc qeb @bkqob clo B`lkljf` Mlif`v Obpb^o`e %@BMO&) Afob`qbro aÖBqrabp ^q qeb B`lib abp E^rqbp Bqrabp bk P`fbk`bp Pl`f^ibp) Pb`obq^ov*Dbkbo^i lc qeb Olv^i B`lkljf` Pl`fbqv) ^ka Pbkflo Bafqlo ^ka @l*@e^foj^k lc qeb ?l^oa lc B`lkljf` Mlif`v+ Eb fp ^ Cbiilt lc qeb B`lkljbqof` Pl`fbqv ^ka lc qeb ?ofqfpe >`^abjv+ Eb fp ^ jbj_bo lc qeb Dolrm lc B`lkljf` Mlif`v >asfpbop ql qeb Mobpfabkq lc qeb Brolmb^k @ljjfppflk) lc qeb Pqbbofkd @ljjfqqbb lc qeb Brol2- Dolrm) ^ka lc qeb ?bii^dfl Dolrm lk qeb Fkqbok^qflk^i B`lkljv+ Molcbpplo Mloqbp t^p ^ Oelabp P`eli^o ^ka ^ Cbiilt lc ?^iifli @liibdb) Lucloa) ^ka e^p ^ipl q^rdeq ^q Mofk`bqlk) E^os^oa) ^ka ?foh_b`h @liibdb %Rkfsbopfqv lc Ilkalk&+ Eb e^p _bbk Afpqfkdrfpeba Dil_^i Sfpfqfkd Molcbpplo ^q qeb E^^p ?rpfkbpp P`elli) Rkfsbopfqv lc @^ifclokf^) ?bohbibv) ^ka Glbi Pqbok Sfpfqfkd Molcbpplo lc Fkqbok^qflk^i Cfk^k`b ^q @lirj_f^ ?rpfkbpp P`elli+ Efp `ro* obkq obpb^o`e fkqbobpqp fk`irab fkqbok^qflk^i j^`olb`lkljf`p) fkqbok^qflk^i cfk^k`b) Brolmb^k _lka j^ohbqp ^ka Brolmb^k fkqbdo^qflk+ Eb e^p tofqqbk buqbkpfsbiv lk dil_^ifp^* qflk) plsbobfdk _looltfkd ^ka ab_q) Brolmb^k jlkbq^ov fpprbp) Brolmb^k cfk^k`f^i j^ohbqp) fkqbok^qflk^i `^mfq^i ciltp) `bkqo^iiv mi^kkba b`lkljfbp ^ka qo^kpfqflk) j^`olb`lkljf` afp* bnrfif_ofrj) ^ka Brolmb^k fkqbdo^qflk+

16 The need for a comprehensive and global solution

Stijn Claessens IMF, University of Amsterdam and CEPR

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17 VOX Research-based policy analysis and commentary from leading economists

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About the Author

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18 The content of coordination

Barry Eichengreen University of California, Berkeley and CEPR

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About the Author

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Charles Wyplosz Graduate Institute, Geneva and CEPR

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About the Author

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22 A proposal to tackle the crisis in Europe

Luigi Guiso and Marco Pagano European University Institute and CEPR; University of Naples Federico II and CEPR

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23 VOX Research-based policy analysis and commentary from leading economists fk`bkqfsbpªlcª_^khªj^k^dbopª^kaª_^khªobdri^qlop)ª^pªtbiiª^pªcloªBrolmb^kªq^um^vbop+ Vbq)ªeltbsboªqb`ekf`^iivª^kaªmlifqf`^iivªqelokv)ªqebpbªfpprbpª`^kªklªilkdboª_bªaladba+ª Plªc^oªtbªe^sbª_bbkª_ibppbaª_vªir`hvª`fo`rjpq^k`bpª*ªklkbªlcªBrolmbÖpªi^odbpqª`olpp* _loaboª_^khpªe^sbª_b`ljbªfkplisbkqªloªpboflrpivªafpqobppba+ª?rqªfcªqefpªtbobªqlªe^m * mbk)ªqebªifjfq^qflkpªlcªBrolmbÖpªmlif`vªobpmlkpbªtlriaª_b`ljbªqo^df`^iivª^mm^obkq+ª

About the Authors

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24 Governments should buy straight preferred stock in their banks

Charles Calomiris Columbia University Graduate School of Business

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QebªD4ªkbbapªqlªcliiltªqebªRHÖpªmi^k)ª^kaªalªplªlkª^ª`lloafk^qbaª_^pfp+ªQe^qªmi^k e^pªqtlªm^oqp+ªCfopq)ªqebªdlsbokjbkqpªjrpqªtlohªqldbqeboªqlªpe^obªqebª_roabkªlc pq^kafkdª_befkaªfkqbo_^khª_looltfkdªfkªqebªIF?LOªj^ohbqªcloª^ª_ofbcªqfjbª%mol_^_iv klqªqlªbu`bbaª^ªjlkqe&)ª^kaª^iplª`lkqfkrbªqlªprmmloqªqebª`ljjbo `f^iªm^mboªj^ohbq+ Qefpª_roabkªpe^ofkdªcliiltpªcoljªqebªc^`qªqe^qªqebpbª_^khpª^obªfkqbok^qflk^iªbkqfqfbp+ ?rqªqefpªfpªklqª^ªilkd*qbojªplirqflk)ª^kaªtfqelrqª^ªilkd*qbojªplirqflkªqefpªhfkaªlc prmmloqª`lriaªbk`lro^dbªsbovªofphvª_be^sflroª_vªqebª_^khp+ Qebªpb`lkaªm^oqªlcªte^qªjrpqª_bªalkbªfjjbaf^qbivª**ªdlsbokjbkqªmro `e^pbpªlc pqo^fdeqªmobcboobaªpql`hª*ª^iplª`lmfbpªqebªRHªmi^k+ªTevªpelriaªqebªdlsbokjbkqpªlcªqeb D4ª_rvªpqo^fdeqªmobcboobaªpql`hªfkªqebfoª_^khp<ªQefpª^aapª`^mfq^iª^kaªifnrfafqvªfjjb * af^qbivªqlªdfsbª_^khpªqebªolljªqlªj^k^dbªqebfoª^ppbqªnr^ifqvª^kaªifnrfafqvªmol_ibjp) tefibªbkprofkdªqe^qª`ljjlkªpql`heliabopª^obªfkª^ªcfopq*ilppªmlpfqflk)ªklqªq^um^vbop+ Qebªabq^fipªlcªeltªqebªmobcboobaªpql`hªfpªabpfdkbaª^obª`or`f^iªqlªfqpªpr``bpp+ªPfk`b q^um^vbopª^obªklqªfkª^ªcfopq*ilppªmlpfqflkª%^pªfkª^ppbqªmro`e^pbp&ªqebobªfpªklªkbbaªqlª^aa rmpfabªt^oo^kqpªloªlqeboªlmqflkp)ª^kaªqebpbª^obªklqªebimcri+ªQebªdlsbokjbkqpªpelria klqª^qq^`eªt^oo^kqpªloª`lksboqf_fifqvªlmqflkpªqlªqebªmobcboobaªpql`h)ªpfk`bªalfkdªpl tlriaªafirqbª`ljjlkªpql`hª^kaªj^hbªfqªe^oaboªqlªo^fpbª`ljjlkªpe^obp)ªtef`e tlriaª_bª`lrkqbomolar`qfsb+ @lrmlkpªlkªqebªmobcboobaªpelriaª_bªpbqªsbo vªiltª%wbolªtlriaª_bªcfkbªtfqeªjb)ªlo qebªqob^pro vª_fiiªo^qb&ªcloªqebªcfopqªqtlªloªqeobbªvb^op)ª^kaªqebkªqebª`lrmlkªpelria grjmªqlªj^ohbqªo^qbpª%fkabubaªqlªpljbª_bk`ej^oh&ªpr_pbnrbkqiv +ªQebªfkfqf^iªilt `lrmlkªtfiiªmolsfabª^kªfjjbaf^qbªifjfqbaªrmªcolkqªpr_pfavªqe^qªtfiiªebimªqlªob`^mf * q^ifwbª_^khp+ªQebªmobcboobaªpe^obpªpelriaª_bª`^ii^_ibªplªqe^qª_^khpª`^kªbufqªqeb ^oo^kdbjbkqª^pªpllkª^pªqebvª^obª_^`hªlkªqebfoªcbbq+ Dlsbokjbkqªpelriaªpbib`qª_^khpªlkª^ª_ol^aª_^pfpªlcª^s^fi^_fifqv)ª_rqªpelriaªab`fab fjjbaf^qbivª^kaªfkª^as^k`bªtef`eª_^khpªe^sbªqlª_bªjbodbaªlrqªlcªbufpqbk`b)ª^ka afpnr^ifcvªqebjªcoljªob`bfsfkdª^kvªcrkap+ªQebªobj^fkfkdª_^khpªtlriaªob`bfsbªcrkap lkª^ªmolªo^q^ª_^pfpªobi^qfsbªqlª^ppbqpªrkaboªj^k^dbjbkqª%^pªfkªCfki^kaªfkª.66/&+ @ljjlkªpql`hªafsfabkapªpelriaª_bªpbqªqlªwbolªcloª^iiª_^khpªob`bfsfkdª^ppfpq^k`b cloªqebªaro^qflkªlcªqebfoªrpbªlcªqebªmobcboobaªpe^obp+ªª?^khpªob`bfsfkdª^ppfpq^k`bªpelria e^sbªqlªabsfpbª^kaªabcbkaª^ª`^mfq^iªmi^kª%cloªo^fpfkdª`ljjlkªpql`h&)ª^kaªjrpqªdo^kq sbqlª^rqelofqvªlsboªj^gloª`lomlo^qbªab`fpflkpª%b+d+)ªjbodbopª^kaª^`nrfpfqflkp&ªqlªqeb dlsbokjbkqª%qlªmobsbkqª^ppbqªpr_pqfqrqflkªofph&+ ?lqeª^pmb`qpªlcªqefpªmi^kª`lriaª_bª^kklrk`baªfjjbaf^qbivª^kaªfjmibjbkqbaªsbov nrf`hivª%tfqefkª^ªtbbh)ªdfsfkdªqfjbªqlªqebªCAF@ªloªlqeboªpfjfi^oª^rqelofqfbp&ªqlªabqbo* jfkbªtef`eª_^khpªtfiiªklqªnr^ifcv+ªKlqbªqe^qªqefpªmol`bppªfpªsfoqr^iivªfabkqf`^iªqlªqeb

25 VOX Research-based policy analysis and commentary from leading economists pr``bppcriªfjmibjbkq^qflkªlcªqebªOb`lkpqor`qflkªCfk^k`bª@lomlo^qflkÖpªmobcbooba pql`hªmoldo^jªfkª.600+

About the Author

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26 An efficient rescue plan

Roger Craine University of California, Berkeley

Mlif`fbp ^ob kbbaba ql rkcobbwb qeb `obafq j^ohbq ^ka ob`^mfq^ifpb _^khp+ Ebob fp ^ mi^k ql al _lqe+

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27 VOX Research-based policy analysis and commentary from leading economists

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About the Author

Oldbo @o^fkb fp Molcbpplo lc B`lkljf`p ^q qeb Rkfsbopfqv lc @^ifclokf^) ?bohbibv) e^sfkd mob* sflrpiv pbsboba ^p Pbkflo B`lkljfpq lk qeb ?l^oa lc Dlsboklop lc qeb Cbabo^i Obpbosb Pvpqbj colj .635*.644+ Eb `roobkqiv fp lk qeb GBA@ ?l^oa lc >asfplop ^ka fp ^ jbj_bo lc qeb FC>@ Fkqbok^qflk^i Moldo^j @ljjfqqbb+ Eb t^p Pmb`f^i Molgb`qp Bafqlo clo qeb Obsfbt lc B`lkljf` Avk^jf`p) ^ka Bafqlo lc qeb Glrok^i lc B`lkljf` Avk^jf`p ^ka @lkqoli+ ?bqtbbk .66/* .664 eb t^p ^ jbj_bo lc qeb Fkqbok^qflk^i ?rob^r clo B`lkljf` Obpb^o`e) ^ka eb t^p ^ jbj_bo lc qeb @lrk`fi lc qeb Pl`fbqv clo B`lkljf` Avk^jf`p _bqtbbk .661*/--1+

28 The wrong financial crisis

J. Bradford DeLong University of California, Berkeley

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29 VOX Research-based policy analysis and commentary from leading economists cfojpª^kaªlcªqebªdil_^iªb`lkljvªo^qeboªqe^kªpfjmivªilkdªfkªsli^qfifqv + ë Jlobªmoldobppfsbªdil_^iªq^uªpvpqbjp+ª Tbªtfpeªtbª`lriaª_rfiaª^ª_bqqboªdil_^iªb`lkljf`ªpvpqbj)ª_rqªtbªalªklqªhkltªelt qlª_rfiaªlkbªqe^qªalbpªklqª`lkq^fkª^ªplifaªp^cbqvªkbqªcloªmirql`o^qp)ª^kaªqebªpvpqbjp tbªalªhkltªeltªqlª_rfiaª^obªmlifqf`^iivªrkprpq^fk^_ibªrkibppª^iiªslqbopªhkltª^ka _bifbsbªqe^qªcoljªqelpbªtelªe^sbªjr`eªtfiiª_bªq^hbkª^t^v +ªQebªdil_^iªj^ohbqªb`lk* ljvª`lkqfkrbpªqlªbs^abª^iiªlroª^qqbjmqpªqlªj^hbªfqªcllimollcª*ªfkªi^odbªm^oqª_b`^rpb lroªdob^qboªcllipª^obªplªfkdbkflrp+ª?rqªqebobªfpªklqªvbqª^kvªobnrfobjbkqªqe^qªqefpªdil_* ^iªb`lkljf`ªaltkqrokªob^`eªqebªj^dkfqrabªlcª.65/)ªloªbsbkª.642+

About the Author

G+ ?o^acloa AbIlkd fp Molcbpplo lc B`lkljf`p ^q qeb Rkfsbopfqv lc @^ifclokf^ ^q ?bohbibv) e^s* fkd mobsflrpiv q^rdeq ^q E^os^oa) ?lpqlk Rkfsbopfqv ^ka JFQ+ Eb fp @l*Bafqlo lc qeb Glrok^i lc B`lkljf` Mbopmb`qfsbp) ^ka ^ Sfpfqfkd P`eli^o ^q qeb Cbabo^i Obpbosb ?^kh lc P^k Co^k`fp`l+ Eb pbosba fk qeb RP dlsbokjbkq ^p Abmrqv >ppfpq^kq Pb`obq^ov lc qeb Qob^prov clo B`lkljf` Mlif`v) ^ka tlohba lk qeb @ifkqlk >ajfkfpqo^qflkÖp .660 _radbq) qeb Rordr^v Olrka qo^ab kbdlqf^qflkp K>CQ>) j^`olb`lkljf` mlif`v) ^ka qeb rkpr``bppcri eb^iqe `^ob obcloj bccloq+ Eb e^p tofqqbk lk) ^jlkd lqebo qlmf`p) qeb bslirqflk ^ka crk`qflkfkd lc qeb RP ^ka lqebo k^qflkpÖ pql`h j^ohbqp) qeb `lropb ^ka abqbojfk^kqp lc ilkd*ork b`lkljf` doltqe) qeb j^hfkd lc b`lkljf` mlif`v) qeb `e^kdfkd k^qrob lc qeb >jbof`^k _rpfkbpp `v`ib) ^ka qeb efpqlov lc b`lkljf` qelrdeq+ Eb fp ^rqelo lc qeb tfabiv ob^a _ild ]Do^pmfkd Ob^ifqv tfqe ?lqe E^kap$+

30 What Europe should do in the shadow of the financial meltdown

Michael Burda Humboldt University and CEPR

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>pªBrolmbÖpªcfk^k`f^iªj^ohbqpªpmfkªaltkªfkqlªqebªsloqbuª`ob^qbaª_vªqebªRPª`obafqª`of * pfp)ªbsbovªkbtªa^vªtfiiª`lkq^fkªkbtªpromofpbp+ªLkivª^ªcbtªjlkqepª^dl)ªqebªob^iªb`lk * ljvªillhbaªplifa)ªtfqeªqebªbrolªmolsfafkdª^kªfjmobppfsbªpefbiaªcoljªcfk^k`f^iªafp * ormqflkª%fj^dfkbªi^pqªvb^oªtfqelrq qebªB@?!&+ª KltªBrolmbªfpªfkªkbd^qfsbªmi^vªabpmfqbªfqpªplifaªcrka^jbkq^ip+ªTe^qª`^kªBrolmbªal qlª`e^kdbªqefp<ªª

Guarantee unsecured intra-bank lending, re-liquefy and recapitalise creatively

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Don't punish the financial sector

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31 VOX Research-based policy analysis and commentary from leading economists tbªmrkfpeªlropbisbp+ªFqªtfiiªmol_^_ivªq^hbªab`^abpªqlªtlohªlrqªqebªfkqbok^qflk^iª`li * i^qbo^iªa^j^dbªlcªqebªIbej^kª_^khormq`v+ªBrolmbª`^kªib^okªcoljªqefpª`lpqivªjfpq^hb+ª

Discuss openly the meaning of a European support fund

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About the Author

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32 No more dithering

Angel Ubide Tudor Investment Corporation

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33 VOX Research-based policy analysis and commentary from leading economists

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About the Author

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34

In the days following the fall of Lehman Brothers in autumn 2008, confidence in the global economy was in freefall. This book, first published as an eBook only a few weeks after the event, outlines the fears of some of the world’s leading economists that the unfolding financial market meltdown had Rescuing the potential to trigger a massive and prolonged recession that would destroy hundreds of millions of jobs worldwide and wipe out the savings of countless households – with the most vulnerable being hit hardest. Our Jobs They were not wrong.

The authors call for policymakers to embark on forceful and coordinated action to avoid the next Great Depression. While their essays differ on many points, a clear consensus emerges on the need and Savings to act swiftly and together.

The authors are: Alberto Alesina, Michael Burda, Charles Calomiris, Roger Craine, Stijn Claessens, J Bradford DeLong, Douglas Diamond, Barry Eichengreen, Daniel Gros, Luigi Guiso, Anil K Kashyap, What G7/8 Leaders Can Marco Pagano, Avinash Persaud, Richard Portes, Raghuram G Rajan, Guido Tabellini, Angel Ubide, Charles Wyplosz and Klaus Zimmermann. Do to Solve the Global Credit Crisis

Edited by Barry Eichengreen and Richard Baldwin

ISBN 978-1-907142-26-0

Centre for Economic Policy Research 77 Bastwick Street, London EC1V 3PZ Tel: +44 (0)20 7183 8801 Fax: +44 (0)20 7183 8820 A VoxEU.org Book 9 781907 142260 Email: [email protected] www.cepr.org