Exit Strategies from the Financial Crisis

In response to the worldwide financial crisis, governments have bailed out their large banks and some of their large companies, thereby earning equity stakes in these enterprises.

In the process, these governments have accumulated massive deficits.

Several central banks no longer just provide short-term credit to commercial banks against highly rated collateral, but have also bought bank assets of dubious long-term value as well as distressed corporate bonds.

As governments have shored up local industry with loans and subsidies, often in the name of the numerous fiscal-stimulus packages, they have generated new forms of protectionism.

None of these developments is sustainable in the longer run. What are socially desirable exit strategies from these policy traps? How and when should governments return the financial industry to private sector hands? How can governments prevent their deficits from rising relentlessly relative to GDP over the business cycle? How can central banks ultimately divest themselves of problematic assets? How can they avoid the danger of inflaton once the current downturn is over? How can governments avoid supporting new forms of protectionism that may be difficult to undo in better times?