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On March 16, 2008, JPMorgan Chase announced its intention to acquire Wall Street investment bank Bear Stearns Inc. The proposed purchase is controversial due to the unprecedented involvement of Bernanke’s Federal Reserve System. JPMorgan Chase agreed to pay 236 million dollars, but shortly after the deal was announced, the Federal Reserve System confirmed that in a complex package of debt securitization agreements, they were underwriting the deal for around 30 billion dollars.

http://en.wikipedia.org/wiki/Ben_Bernanke

• Episodes of financial turmoil characterized
by banking distress are more often associated
with severe and protracted downturns than
episodes of stress centered mainly in securities
or foreign exchange markets.
• The likelihood that financial stress will be
followed by a downturn appears to be associated
with the extent to which house prices
and aggregate credit rise in the period before
the financial stress. Moreover, greater reliance
on external financing by households and
nonfinancial firms is associated with sharper
downturns in the aftermath of financial stress.
• Countries with more-arm’s-length financial
systems appear to be vulnerable to sharper
contractions in economic activity in the wake
of banking stress, because leverage in the
banking system appears to be more procyclical
in countries characterized by greater
financial innovation.
• The importance of core financial intermediaries
in transmitting financial shocks to the
real economy suggests that policies that help
restore the capital base of these institutions
within a strong framework of financial stability
can help alleviate downturns.
• The patterns of asset prices and aggregate
credit in the United States during the current
episode of financial stress appear similar to
those of previous episodes that were followed
by recessions. In particular, changes in
the pattern of household net borrowing—a
measure of reliance on external financing—
closely track the trajectory of past recessions.
Nonfinancial firms entered the turmoil from
a relatively strong position. Combined with
the large losses sustained by core banking
institutions, these factors suggest that the
United States continues to face considerable
recession risks, even though real interest rates
are low by the standards of financial-stressdriven
recessions. In the euro area, households’
relatively strong balance sheets offer
some protection against a sharp downturn,
despite the sizable increases of asset prices
and credit ratios preceding the financial
turmoil.

http://www.imf.org/external/pubs/ft/weo/2008/02/pdf/c4.pdf

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Six months ago, G7 leaders pledged to implement a series of recommendations to try to right the financial system, such as encouraging banks to disclose losses and raise new capital, but the crisis has worsened considerably since then and the response needs to change, too.

By Emily Kaiser

WASHINGTON (Reuters) – World finance leaders who improvised their way through the first year of the credit crisis may finally be ready to come up with a comprehensive plan to clean up the mess, the IMF’s chief economist said on Wednesday.

Wed Oct 8, 2008 12:41pm EDT

http://www.reuters.com/article/topNews/idUKTRE4978JH20081008?virtualBrandChannel=10341

***

World Economic and Financial Surveys

World Economic Outlook (WEO)

Financial Stress, Downturns, and Recoveries

October 2008
©2008 International Monetary Fund

World Economic Outlook Database
October 2008

http://www.imf.org/external/pubs/ft/weo/2008/02/index.htm

5.3 Real GDP Growth and Fiscal Impulse by Composition: All Economies

Chart Data 1.1 Global Indicators
Chart Data 1.2 Current and Forward-Looking Indicators
Chart Data 1.3 Global Inflation
Chart Data 3.10 Monetary and Exchange Rate Policies
List of Tables Part A
Output (Tables A1–A4)
Inflation (Tables A5–A7)
Financial Policies (Table A8)
Foreign Trade (Table A9)
Current Account Transactions (Tables A10–A12)
Balance of Payments and External Financing (Tables A13–
A15)
Flow of Funds (Table A16)
Medium–Term Baseline Scenario (Table A17)

Chapter 1. Global Prospects and PoliciesChapter 2. Country and Regional Perspectives

Chapter 3. Is Inflation Back? Commodity Prices and Inflation

Chapter 4. Financial Stress and Economic Downturns

Chapter 5. Fiscal Policy as a Countercyclical Tool

Chapter 6. Divergence of Current Account Balances across Emerging Economies
Executive Summary

Data Animations

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