What should economists and policymakers learn from the financial crisis?
What should economists and policymakers learn from the financial crisis? Dr. Ben S Bernanke, Chairman of the Board of Governors of the Federal Reserve System, London School of Economics and Political Science, March 25, 2013
“For me, perhaps the central insight is that the recent crisis, despite its many exotic features, was in fact a classic financial panic–a systemwide run of “hot money” away from as sets whose values suddenly became uncertain. In that respect, the crisis was akin to many other financial crises faced by governments and central banks–including that most venerable of central banks, the Bank of England–over the centuries. The response to the crisis likewise followed the classic prescriptions of liquidity provision, liability guarantees, asset evaluation and disposition, and recapitalization where necessary. Although the crisis had classic features, to a significant extent it took place in a novel institutional context, making diagnosis and response more challenging: For example, in the United States, collateralized wholesale funding rather than conventional bank deposits constituted the hot money, and run pressure was experienced not only by banks but by diverse other institutions, such as structured investment vehicles. In addition, the scale and complexity of globalized financial institutions and markets made
it difficult to predict how the crisis might spread or to coordinate the response. One of the few positive aspects of this episode was the extraordinary degree of international cooperation achieved among policymakers, including the Bank of England and the Federal Reserve, in responding to the crisis.”
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