Conclusion
Having analyzed the root causes of the crisis, one has to focus on implying remedies that would prevent it from occurring once again in the future. Since the crisis resulted both from actions (policy) within the US and situation in the world, the remedies should be looked for also in both of these sources.
First, there can be made no changes and the economy will cure itself. The aggregate demand in the countries with negative CA falls, thus their imports should fall as well. It implies that China’s trade balance will fall down, thus making possibilities for saving to be comparable with investment opportunities.
The second idea is to get rid of pegging renminbi to US dollar (and let it appreciate), which will also lead to the decrease in the China’s trade balance and the ultimate result will be similar to the one described above.
Recommendations for the internal policy could be summarized as increasing spending (to stimulate aggregate demand), and targeted tax cuts and transfers. These measures are believed to have the highest multipliers.6 Monetary measures would turn futile in the US as there is no room for decreasing the interest rate. Quantitative easing also proved to be useful to tackle the credit crunch; however, it should be used for US $ with utmost care under the condition of the current financial system not to destabilize the global economy.
If it comes to a banking system, the more strict regulation should be implied, including measures to avoid rating agencies to allow for mass underestimation of systematic risk. Above that a crisis management framework should be used to avoid moral hazard and protect the tax payer if necessary.
Sources
U.S. Taxpayers Risk $9.7 Trillion on Bailout Programs, Pittman M. and Ivry B., 2009 Feb. 9 Bloomberg, http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=aGq2B3XeGKok
Obstfeld, Maurice and Kenneth Rogoff, Global Imbalances and the Financial Crisis: Products of Common Causes, 2009
China Drowning in Money: What It Means for the U.S. By Derek Scissors, Ph.D. Asia Economic Policy in the Asian Studies Center, The Heritage Foundation
China, South Korea, Taiwan money supply M0. www.tradingeconomics.com
The Return of Depression Economics and the Crisis of 2008, 2009
IMF (Antonio Spilimbergo, Steve Symansky, Olivier Blanchard,and Carlo Cottarelli), Fiscal Policy for the Crisis, 2008
1 U.S. Taxpayers Risk $9.7 Trillion on Bailout Programs, Pittman M. and Ivry B., 2009 Feb. 9 (Bloomberg)
http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=aGq2B3XeGKok
2The alternative explanation is discussed in the furthering section
3 China Drowning in Money: What It Means for the U.S. By Derek Scissors, Ph.D. Asia Economic Policy in the Asian Studies Center, The Heritage Foundation
4 China, South Korea, Taiwan money supply M0. www.tradingeconomics.com
5 The Return of Depression Economics and the Crisis of 2008, 2009
6IMF (Antonio Spilimbergo, Steve Symansky, Olivier Blanchard,and Carlo Cottarelli), Fiscal Policy for the Crisis, 2008