jean - claude trichet : macroeconomic policies, imbalances and the need to avoid going back to the status quo ante address by mr jean - claude trichet, president of the european central bank, at the annual joint parliamentary meeting, european parliament, brussels, 16 february 2009. * * * monsieur le president du parlement europeen, monsieur le president du senat de la republique tcheque, monsieur le president de la chambre des deputes de la republique tcheque, mesdames et messieurs les parlementaires europeens et les parlementaires nationaux, je me rejouis beaucoup de participer a cette reunion interparlementaire a bruxelles. alors que nous ne sommes qu ’ a la mi - fevrier, c ’ est deja ma troisieme rencontre cette annee avec le parlement europeen. cela montre encore une fois a quel point le dialogue entre la banque centrale europeenne et le parlement est etroit. auch heute steht unser austausch im zeichen der außergewohnlichen wirtschaftlichen lage. die weltwirtschaft erfahrt einen starken konjunkturellen abschwung. dieser hat mittlerweile auch die eu erfasst. regierungen, parlamente und zentralbanken haben rasch und entschlossen reagiert. ich mochte heute auf einen aspekt hinweisen, der mir besonders wichtig erscheint ; namlich, dass wir bei all unserer entschlossenheit nicht die notwendige mittelfristige orientierung unserer entscheidungen aus den augen verlieren. diesen aspekt mochte ich ihnen erlautern. our primary and most immediate task as policy - makers is to help resolve this crisis, in cooperation with the private sector. we need to address the fundamental causes underlying the crisis : in the international financial system, in the international setting of macroeconomic policies and in the international financial architecture. and yet, we also need to make sure that our decisions today

concerns about counterparty credit risk, which then feed back in the form of intensifying funding pressures. recent research by allen and gale ( 2007 ) confirms that, in principle at least, " fire sales " forced by sharp increases in investors'liquidity preference can drive asset prices below their fundamental value, at significant cost to the financial system and the economy. their work underscores the basic logic in bagehot's prescription for crisis management : a central bank may be able to eliminate, or at least attenuate, adverse outcomes by making cash loans secured by borrowers'illiquid but sound assets. thus, borrowers can avoid selling securities into an illiquid market, and the potential for economic damage – arising, for example, from the unavailability of credit for productive purposes or the inefficient liquidation of long - term investments – is substantially reduced. liquidity powers of other central banks this prescription for providing liquidity in a crisis is simple in theory, but, in practice, it can be far more complicated. for instance, how should the central bank distinguish between institutions whose liquidity pressures stem primarily from a breakdown in financial market functioning and those whose problems fundamentally derive from underlying concerns about their solvency? the answer, at times, is by no means straightforward. there are other complexities, too. central banks provide liquidity through a variety of mechanisms, including open market operations and direct credit extension through standing lending facilities. the choice of tools in a crisis depends on the circumstances as well as on specific institutional factors. the european central bank ( ecb ), for example, routinely conducts open market operations with a wide range of counterparties against a broad range of collateral. in recent months, in light of intense pressures in term funding markets, the ecb has provided relatively large quantities of reserves through longer - term open market operations. extending this strategy, the ecb also introduced a new refinancing operation with a six - month maturity. the first of these was executed on april 2 and was well received. the bank of england has followed a similar strategy, expanding their term open market operations and accepting a wider range of collateral. very recently, the bank of england also initiated a special liquidity facility that allows banks to swap high - quality mortgage - backed and other securities for u. k. treasury bills. differences in legal and institutional structure have affected the methods used by various central banks to inject liquidity in their markets. in