The International Response to the Financial Credit Freeze

{
  "authors": [
    "Albert Keidel"
  ],
  "type": "legacyinthemedia",
  "centerAffiliationAll": "dc",
  "centers": [
    "Carnegie Endowment for International Peace"
  ],
  "collections": [],
  "englishNewsletterAll": "asia",
  "nonEnglishNewsletterAll": "",
  "primaryCenter": "Carnegie Endowment for International Peace",
  "programAffiliation": "AP",
  "programs": [
    "Asia"
  ],
  "projects": [],
  "regions": [
    "North America",
    "United States",
    "China"
  ],
  "topics": [
    "Economy"
  ]
}

In The Media

The International Response to the Financial Credit Freeze

The United States is witnessing, at least temporarily, the collapse of effective liquidity for the complex financial instruments that have long been used to conduct transactions. But the real crisis is a Keynesian downward spiral, whereby declining consumption and declining investment reinforce each other.

By Dr. Albert Keidel

Published on Oct 9, 2008

Source: The Diane Rehm Show

With the global financial crisis continuing to accelerate, Albert Keidel joined a panel of experts on the Diane Rehm Show to discuss how the current situation arose and what can be done to move forward. He argued that low interest rates are not as important as they are often made out to be. When credit is frozen the way it is now, they may help banks borrow from the Federal Reserve, but they will not significantly change the rates at which banks lend to each other or influence who buys paper from the commercial market. Keidel noted that the Fed is taking unprecedented steps to buy commercial paper on a very large scale.

The United States is witnessing, at least temporarily, the collapse of effective liquidity for the complex financial instruments that have long been used to underpin transactions. For that reason, it is dubious to state that enough money has been injected into the credit market. It is also misleading to look at current price/earnings ratios to assess what the true bottom of this crisis is. The real potential crisis, he believes, is a Keynesian downward spiral, whereby declining consumption and declining investment reinforce each other.

Keidel noted that China, Japan, and India are faring better than most economies amidst the current global turmoil. It remains to be seen how smaller Asian economies will fare in the face of exchange rate pressures since they do not have strong mechanisms for handling capital flight.

There are precedents for solving credit crises, but developed countries are not accustomed to having to resort to using them. The U.S. government needs to take over failing banks, fix them, and resell them. The presidential candidates should not be stressing budgetary responsibility. Keidel maintains that America will have to engage in major deficit spending, just as it has during every serious downturn.

Click here to listen to Albert Keidel on the Diane Rehm Show.

About the Author

Dr. Albert Keidel

Former Senior Associate, China Program

Keidel served as acting director and deputy director for the Office of East Asian Nations at the U.S. Department of the Treasury. Before joining Treasury in 2001, he covered economic trends, system reforms, poverty, and country risk as a senior economist in the World Bank office in Beijing.

Recent Work

Article
As China's Exports Drop, Can Domestic Demand Drive Growth?
- Dr. Albert Keidel
Article
China’s Fourth Quarter 2008 Statistical Record
- Dr. Albert Keidel

Economy North America United States China

Carnegie India does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.

More Work from Carnegie India

Commentary
The Unresolved Challenges in U.S.–India Semiconductor Cooperation
The U.S.–India semiconductor cooperation story is well-stocked with top-level strategic intent. What remains unresolved, however, are some underlying challenges that will determine whether the cooperation actually functions. Three such friction points stand out.
Shruti Mittal
Article
India’s Press Note 3 Gamble: Opening the FDI Door to China
On March 10, 2026, India’s Union Cabinet approved amendments to Press Note 3, a regulation that mandated government approval on all foreign direct investment (FDI) from countries sharing a land border with India. This amendment raises questions primarily about whether its stated benefits will materialize and if the risks have been adequately weighed. This piece will address the same.
Konark Bhandari
Article
What Could a Reciprocal Defense Procurement Agreement Do for U.S.-India Ties?
India and the United States are close to concluding a Reciprocal Defense Procurement Agreement (RDPA) that will allow firms from the two countries to sell to each other’s defense establishments more easily. While this may not remedy the specific grievances both sides may have regarding larger bilateral issues, an RDPA could restore some momentum, following the trade deal announcement.
Konark Bhandari
Commentary
India Signs the Pax Silica—A Counter to Pax Sinica?
On the last day of the India AI Impact Summit, India signed Pax Silica, a U.S.-led declaration seemingly focused on semiconductors. While India’s accession to the same was not entirely unforeseen, becoming a signatory nation this quickly was not on the cards either.
Konark Bhandari
Commentary
The Impact of U.S. Sanctions and Tariffs on India’s Russian Oil Imports
This piece examines India’s response to U.S. sanctions and tariffs, specifically assessing the immediate market consequences, such as alterations in import costs, and the broader strategic implications for India’s energy security and foreign policy orientation.
Vrinda Sahai

The International Response to the Financial Credit Freeze

More Work from Carnegie India

Commentary

The Unresolved Challenges in U.S.–India Semiconductor Cooperation

The U.S.–India semiconductor cooperation story is well-stocked with top-level strategic intent. What remains unresolved, however, are some underlying challenges that will determine whether the cooperation actually functions. Three such friction points stand out.

Shruti Mittal

Article

India’s Press Note 3 Gamble: Opening the FDI Door to China

On March 10, 2026, India’s Union Cabinet approved amendments to Press Note 3, a regulation that mandated government approval on all foreign direct investment (FDI) from countries sharing a land border with India. This amendment raises questions primarily about whether its stated benefits will materialize and if the risks have been adequately weighed. This piece will address the same.

Konark Bhandari

Article

What Could a Reciprocal Defense Procurement Agreement Do for U.S.-India Ties?

India and the United States are close to concluding a Reciprocal Defense Procurement Agreement (RDPA) that will allow firms from the two countries to sell to each other’s defense establishments more easily. While this may not remedy the specific grievances both sides may have regarding larger bilateral issues, an RDPA could restore some momentum, following the trade deal announcement.

Konark Bhandari

Commentary

India Signs the Pax Silica—A Counter to Pax Sinica?

On the last day of the India AI Impact Summit, India signed Pax Silica, a U.S.-led declaration seemingly focused on semiconductors. While India’s accession to the same was not entirely unforeseen, becoming a signatory nation this quickly was not on the cards either.

Konark Bhandari

Commentary

The Impact of U.S. Sanctions and Tariffs on India’s Russian Oil Imports

This piece examines India’s response to U.S. sanctions and tariffs, specifically assessing the immediate market consequences, such as alterations in import costs, and the broader strategic implications for India’s energy security and foreign policy orientation.

Vrinda Sahai