Dear oh dear! Tory tricksters? The team of Mark Textor and Lynton Crosby, fresh from a success with a London Lord Mayor, are off and running again with another election. The New Zealand papers have been fascinated by the appearance of the pair as campaign aides for National leader John Key although they were unsuccessful during their last foray across the Tasman when Helen Clark won a third term as Prime Minister back in 2005. The duo was mentioned this week by Ms Clark who said there will always be suspicions about the strategists used by the National Party because it isn’t honest about them. “I think the good thing is that light is now being shone on the tactics of these particular Tory tricksters,” she said at her post-Cabinet press conference. The Clark Government will need a lot more than light if the opinion polls are to be believed. Her Labour Party goes into the final months of this election year 25 percentage points behind – 30 per cent to National’s 55 per cent.

A gay side show. American elections always provide a few side shows to go with the main event and this November none will be followed more closely than the attempt in California to overturn a recent court decision authorizing same sex marriage. The referendum campaign is well and truly underway with opinion divided about the outcome. At the Intrade betting exchange it is pretty much 50:50.

Obama moves ahead. Becoming clearer is public opinion on the Presidential election campaign itself. Here confidence is growing that the Democratic Party will emerge victorious.

The difficult task of damage control. If the Australian papers have not depressed you enough with economic news this morning then give yourself a real fright by hopping on to the website of the Bank for International Settlements. This august body of advisers to the central bankers of the world has just released its annual report and heads its conclusion “the difficult task of damage control.” A small sample of the cheerless findings:

In the aftermath of a long credit-driven boom, it would not be surprising to see turmoil in financial markets, slowing real growth and temporarily rising inflation. The crucial questions at the present juncture have to do with the severity of these individual trends as they now appear and how they might interact. While difficult to predict, their interaction does appear to point to a deeper and more protracted global downturn than the consensus view seems to expect. At the same time, inflationary forces, particularly in emerging market economies, could also prove unexpectedly strong and persistent. A major factor in inflation prospects everywhere is likely to be the behaviour of wages, but in some countries the effect of a depreciating exchange rate on domestic prices could also play an unwelcome role.

With inflation a clear and present threat, and with real policy rates in most countries very low by historical standards, a global bias towards monetary tightening would seem appropriate. That said, the circumstances of different countries, both actual and prospective, currently rule out a “one size fits all” response. Moreover, should the global economy slow sharply and inflationary pressures recede, the bias to tightening would evidently also be reduced.

In the current and prospective environment, it should nonetheless be borne in mind that the effectiveness of a lowering of policy rates might be significantly reduced in the aftermath of a credit-induced spending boom. In view of the potential negative side effects of such a policy, not least the risk of encouraging further financial imbalances and misallocations of real resources, complementary policies might be envisaged to avoid overburdening monetary easing. Expansionary fiscal policy could have some merit, but in many countries current debt levels mean there is little room for manoeuvre. Steps to recognise and deal with losses and debt overhang problems, in a timely and orderly way, and subject to conditionality, must then be a high priority.

Perhaps the principal conclusion to be drawn from today’s policy challenges is that it would have been better to avoid the build-up of credit excesses in the first place. In future, this could be done through the establishment of a new macrofinancial stability framework, which would call for both monetary and macroprudential policies to “lean against the wind” of the credit cycle. Recognising that cycles can be attenuated but not eliminated, a number of preparatory steps are also suggested that would allow periods of financial turmoil or crisis to be more effectively managed.