Abstract

Global financial markets are showing strains on a scale and scope not witnessed in the past three-quarters of a century. What started with elevated losses on U.S. subprime mortgages has spread beyond the borders of the United States and the confines of the mortgage market. Many risk spreads have ballooned, liquidity in some market segments has dried up, and large complex financial institutions have admitted significant losses. Bank runs are no longer the subjects exclusively of history. These events have challenged policymakers, and the responses have varied across region. The European Central Bank has injected reserves in unprecedented volumes. The Bank of England participated in the bail-out and, ultimately, the nationalization of a depository, Northern Rock. The U.S. Federal Reserve has introduced a variety of new facilities and extended its support beyond the depository sector. These events have also challenged economists to explain why the crisis developed, how it is unfolding, and what can be done to develop increased awareness about the current financial crisis, to facilitate the discussion regarding myths and realities about the crisis, to discuss possible ways to bring out the Indian economy out of this crisis and to discuss the measures available to insulate the economy from further vulnerability to this crisis.

Key words: Global financial markets, Financial crisis, European Central Bank