The U.S. Federal Reserve Board and the Bank of England on March 23 denied a March 22 Financial Times report that they are considering making bulk purchases of mortgage-backed securities to ease the global credit crisis. Citing unnamed sources, the economics editor of the Financial Times had described the British central bank as being enthusiastic and the Federal Reserve as being "open in principle" to such purchases. The argument for making this move is that the valuations of mortgage-backed securities have been marked down to such unrealistically low levels through "mark-to-market" accounting practices that the banks and financial institutions holding them are having to write down these assets well below face value. But while face value of these securities might be too high in the current deteriorating housing market on both sides of the Atlantic, actual house prices have not fallen by anywhere near the proportion of the derivatives they underpin. It was this massive write-down of asset values at Bear Stearns that caused its stock to crash, nearly bankrupting the firm and enabling JP Morgan Chase to pick it up at $2 a share. While the Bank of England apparently was much keener than the Federal Reserve on exploring the idea reported in the Financial Times, a taxpayer-funded bailout would have been enormously expensive. The British government already has committed almost $200 billion to achieve the same objective with just one British bank, Northern Rock, which it nationalized in February. The European Central Bank (ECB) also dismissed the idea of buying back mortgage-backed securities — which would lead to government ownership of the original mortgages from which these derivates were created. The ECB would have needed the approval of all its member countries for such a move. While categorically denying that it was looking at schemes laying the credit risk at the feet of taxpayers — rather than the banks — the Bank of England did confirm March 23 that it is in talks to find a way out of a credit crisis that is likely to get worse before it is resolved. Proposals for a global solution to this crisis will next be considered at the G-7 meeting set for April 11 in Washington. This will coincide with a policymaking meeting of Interim Committee of the International Monetary Fund. These meetings will involve the finance ministers and central bankers of all the major countries. Leading commercial and investment bankers normally are present on the sidelines of such meetings, too. The Financial Stability Forum — the international body that links senior officials from central banks, regulatory bodies such as the U.S. Securities and Exchange Commission, various national treasury departments and international financial institutions — will present the G-7 with its final report into the causes of the credit crunch and offer proposals for its resolution. The package probably will include calls for closer supervision of Wall Street, London and other financial centers, as well as stiffer regulation, with some regulatory responsibilities shifted to central banks like the Fed. The proposal by U.S. Rep. Barney Franks, chairman of the House Financial Services Committee, for regulators to be given more power to monitor risks that threaten the financial system probably will receive widespread support at the G-7 (and within the U.S. Congress). These risks are likely to include the practice of speculative short-selling, where speculators "borrow" stock or options of a company they perceive as weak, which they then sell. If it falls, the speculators buy it back at a substantial profit. But changing regulatory regimes requires legislation — and even so, legislation alone will not end the present credit crunch. Before the Washington meetings, a further wave of market volatility is likely as speculators and hedge funds test the strength of leading players like Merrill Lynch and UBS. Before the weekend of March 22, the speculators tested the strength of British bank HBOS, but failed. But while the collapse or takeover of another major institution cannot be ruled out, this is by no means the main problem facing the global economy. The main problem is that, as banks and other financial institutions seek to repair their ravaged balance sheets, they are increasingly reluctant to lend money to other banks, to businesses and to prospective homeowners. While the Fed might continue to reduce rates and pump more money into the economy, the real cost of borrowing goes up as capital is rationed by the private sector. There is a genuine fear that the availability of credit will be restricted for some time. And the longer the credit squeeze goes on, the greater the likelihood the real economy will be damaged. Despite the turmoil, unemployment in the 30 wealthy countries that make up the Organization for Economic Cooperation and Development (OECD) thus far has risen by only 0.3 percent in the past year; that average is the same for United States. Despite all those who say the United States already is in recession, on March 21 the OECD forecast U.S. economic growth of 0.01 percent for the present quarter and 0 percent for the next quarter. By the technical definition of a recession — which is two successive quarters of negative growth — the United States is not in a recession yet. But a prolonged credit squeeze will make a recession unavoidable. So long as there is a credit squeeze in the United States and in the United Kingdom that ensures that house prices will continue to fall, consumer confidence will erode and consumer spending will sag. People cannot buy homes even at sharply reduced prices without access to reasonable credit. And businesses (particularly small businesses), on which so much of the recent expansion has depended, cannot flourish without access to finance. The problem central banks face is as much about getting the normal wheels of banking to turn again as it is about repairing battered balance sheets. If the first can be fixed, over time, the second will be repaired, too — and many lessons will have been learned.