IMF has released its World Economic Outlook and Global Financial Stability Report (nice titles: Financial stress, downturns, deleveraging).

One interesting chart showing asset allocations to risk assets is below:


I now see markets that have zero losses related to subprime/credit derivatives and good growth prospects “infected” by the fact that healthy daughter banks are forced by mother banks to tighten credit conditions and to stop lending to other banks. This is wrong, it has nothing to do with local fundamentals and as such should be prevented by local authorities.

I am not suggesting anything yet, but I do recall a letter that Paul Krugman wrote to Malaysian PM Dr Mahatir when he introduced temporary currency controls, as recommended by Krugman. It did pay off. This is not a currency crisis, this is liquidity and confidence crisis. Now the question.  What should be done by authorities in a healthy country with healthy banks that suffers from contagion from failing parent banks? Any thoughts?