The foreward states, "Developments in financial markets have dominated the news in recent weeks. The subprime crisis that unfolded in 2007 has now morphed into a credit crisis that has caused major disruption to financial institutions in the United States and Europe. Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown. The effects on the real economy have been limited so far. In part, this may be because tax rebates in the United States supported consumption, while strong nonfinancial corporate balance sheets and profitability have allowed firms to use their own funds rather than borrow. But neither of these factors can be expected to last for very long. Credit conditions have become significantly tighter in recent weeks, threatening the ability of nonfinancial firms and a number of emerging economies to raise capital. The U.S. and European authorities have taken extraordinary measures, including massive liquidity provision, intervention to restore weak institutions, extension of guarantees, and recent U.S. legislation to use public funds to buy troubled assets from banks. But it is not yet clear that these measures will be sufficient to stabilize markets and bolster confidence, and the situation remains highly uncertain.
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the news in recent weeks. The subprime crisis that unfolded in 2007 has now morphed
into a credit crisis that has caused major disruption to financial institutions in the United States
and Europe. Intensifying solvency concerns about a number of the largest U.S.-based and
European financial institutions have pushed the global financial system to the brink of systemic
meltdown. The effects on the real economy have been limited so far. In part, this may be because tax rebates in the United States supported consumption, while strong nonfinancial corporate balance sheets and profitability have allowed firms to use their own funds rather than borrow. But neither of these factors can be expected to last for very long. Credit conditions have become significantly tighter in recent weeks, threatening the ability of nonfinancial firms
and a number of emerging economies to raise capital. The U.S. and European authorities have taken extraordinary measures, including massive liquidity provision, intervention to restore
weak institutions, extension of guarantees, and recent U.S. legislation to use public funds to buy
troubled assets from banks. But it is not yet clear that these measures will be sufficient to stabilize markets and bolster confidence, and the situation remains highly uncertain.