Posted Content•
Lessons from the global financial crisis for regulators and supervisors
01 Jul 2009-Research Papers in Economics (Financial Markets Group, London School of Economics and Political Science)-
TL;DR: In this article, a tour d'horizon of the financial crisis aimed at extracting lessons for future financial regulation is presented, which combines normative recommendations based on conventional welfare economics with positive assessments of the kind of measures likely to be adopted based on political economy considerations.
Abstract: This lecture is a tour d’horizon of the financial crisis aimed at extracting lessons for future financial regulation. It combines normative recommendations based on conventional welfare economics with positive assessments of the kind of measures likely to be adopted based on political economy considerations.
Citations
More filters
TL;DR: In this article, the authors explain how and why macro-prudential regulation moved to the centre of the policy agenda and came to represent a new Basel consensus, as the principal interpretative frame, for financial technocrats and regulators seeking to diagnose and understand the financial crisis and to advance institutional blueprints for regulatory reform.
Abstract: From late 2008 onwards, in the space of six months, international financial regulatory networks centred around the Swiss city of Basel presided over a startlingly rapid ideational shift, the significance and importance of which remains to be deciphered. From being relatively unpopular and very much on the sidelines, the idea of macroprudential regulation (MPR) moved to the centre of the policy agenda and came to represent a new Basel consensus, as the principal interpretative frame, for financial technocrats and regulators seeking to diagnose and understand the financial crisis and to advance institutional blueprints for regulatory reform. This article sets out to explain how and why that ideational shift occurred. It identifies four scoping conditions of presence, position, promotion, and plausibility, that account for the successful rise to prominence of macroprudential ideas through an insiders' coup d'etat. The final section of the article argues that this macroprudential shift is an example of a ‘ges...
239 citations
TL;DR: In this article, the authors review the evolution of the global financial crisis, draw lessons from it, and analyse its effect(s) on the Islamic financial industry (IFI) and suggest necessary steps for the future development of the industry.
Abstract: Purpose – The purpose of this paper is to review the evolution of the global financial crisis, draw lessons from it, and analyse its effect(s) on the Islamic financial industry (IFI).Design/methodology/approach – Based on an extensive literature review, this paper aims to highlight, explain, and discuss the implications of the global financial crisis for IFI and suggest necessary steps for the future development of the industry.Findings – The findings show that although the crisis had limited impact on IFI the major flaws of the capitalist financial system are relevant to the development of IFI. Without learning and applying the lessons from the crisis, IFI runs a risk of committing the same mistakes. Finally, greater attention should be given to the fundamental principles of Islamic finance in order to ensure the future development of industry.Research limitation/implications – The effects of the global financial crisis are still being felt all over the world, and its implications on IFI have yet to be f...
112 citations
Cites background from "Lessons from the global financial c..."
...Moreover, short-term stability is itself ultimately destabilizing as it promotes complacency followed by excessive risk taking and, in the end, exacerbated instability ( Buiter, 2009...
[...]
Book•
23 Oct 2020
TL;DR: In this paper, the authors present an in-depth analysis of the main features of global and national debt accumulation episodes, analyzes the linkages between debt accumulation and financial crises, and draws policy lessons.
Abstract: ADVANCE EDITION OF BOOK EXPECTED IN 2020. The global economy has experienced four waves of debt accumulation over the past fifty years. The first three debt waves ended with financial crises in many emerging and developing economies. The latest, since 2010, has already witnessed the largest, fastest and most broad-based increase in debt in these economies. Their total debt has risen by 54 percentage points of GDP to a historic peak of almost 170 percent of GDP in 2018. Current low interest rates mitigate some of the risks associated with high debt. However, emerging and developing economies are also confronted by weak growth prospects, mounting vulnerabilities, and elevated global risks. A menu of policy options is available to reduce the likelihood of the current debt wave ending in crisis and, if crises were to take place, alleviate their impact. To shed light on the implications of the rapid debt accumulation, Global Waves of Debt presents the first in-depth analysis of the main features of global and national debt accumulation episodes, analyzes the linkages between debt accumulation and financial crises, and draws policy lessons.
99 citations
Cites background from "Lessons from the global financial c..."
...10 For studies on general lessons from the global financial crisis, see Dabrowski (2010) and IMF (2018); for specific policy areas such as financial supervision and regulation or corporate governance, see Buiter (2009); Claessens et al. (2010); Claessens, Kose, and Terrones (2010); Dewatripont, Rochet, and Tirole (2010); King (2018); and Liang, McConnell and Swagel (2018)....
[...]
...10 For studies on general lessons from the global financial crisis, see Dabrowski (2010) and IMF (2018); for specific policy areas such as financial supervision and regulation or corporate governance, see Buiter (2009); Claessens et al....
[...]
01 Sep 2013
TL;DR: In this article, the authors discuss recent experiences with inflation targeting (IT), the challenges that it faces since the global financial crisis, and ways to address them, conducted from the perspective of upper middle-income countries (MICs).
Abstract: This paper discusses recent experiences with inflation targeting (IT), the challenges that it faces since the global financial crisis, and ways to address them. The discussion is conducted from the perspective of upper middle-income countries (MICs). As background for the analysis, the second part provides a review of financial systems in MICs (with a focus on the role of bank credit), the extent to which exposure to capital flows affect economic stability in these countries, and the link between excessive credit growth and financial crises. The third and fourth parts review the main features and evidence on the performance of IT regimes in MICs. The fifth part discusses a number of challenges that IT faces, including fiscal dominance, fear or floating, imperfect credibility, and with respect to an explicit financial stability objective assigned to monetary policy. The issue of complementarity between macroprudential regulation and monetary policy, in the context of an “integrated” IT (or IIT) regime, is taken up next. The nature of monetary policy rules in an IIT regime, and their practical implementation, is also discussed. Our analysis suggests that there are robust arguments to support the view that in an IIT regime monetary policy should react in a state contingent fashion to a credit gap measure – and possibly to the real exchange rate – to address the time-series dimension of systemic risk. However, monetary policy and macroprudential policy are largely complementary instruments. They must be calibrated jointly, in the context of macroeconomic models that account for the type of credit market imperfections observed in MICs and for the fact that macroprudential regimes may affect in substantial ways the monetary transmission mechanism.
52 citations
References
More filters
Book•
01 Jan 1936
TL;DR: In this article, a general theory of the rate of interest was proposed, and the subjective and objective factors of the propensity to consume and the multiplier were considered, as well as the psychological and business incentives to invest.
Abstract: Part I. Introduction: 1. The general theory 2. The postulates of the classical economics 3. The principle of effective demand Part II. Definitions and Ideas: 4. The choice of units 5. Expectation as determining output and employment 6. The definition of income, saving and investment 7. The meaning of saving and investment further considered Part III. The Propensity to Consume: 8. The propensity to consume - i. The objective factors 9. The propensity to consume - ii. The subjective factors 10. The marginal propensity to consume and the multiplier Part IV. The Inducement to Invest: 11. The marginal efficiency of capital 12. The state of long-term expectation 13. The general theory of the rate of interest 14. The classical theory of the rate of interest 15. The psychological and business incentives to liquidity 16. Sundry observations on the nature of capital 17. The essential properties of interest and money 18. The general theory of employment re-stated Part V. Money-wages and Prices: 19. Changes in money-wages 20. The employment function 21. The theory of prices Part VI. Short Notes Suggested by the General Theory: 22. Notes on the trade cycle 23. Notes on mercantilism, the usury laws, stamped money and theories of under-consumption 24. Concluding notes on the social philosophy towards which the general theory might lead.
15,146 citations
13,200 citations
Book•
01 Jan 1986TL;DR: In his seminal work, Minsky presents his groundbreaking financial theory of investment, one that is startlingly relevant today as mentioned in this paper, explaining why the American economy has experienced periods of debilitating inflation, rising unemployment, and marked slowdowns and why the economy is now undergoing a credit crisis that he foresaw.
Abstract: "Mr. Minsky long argued markets were crisis prone. His 'moment' has arrived." -The Wall Street Journal In his seminal work, Minsky presents his groundbreaking financial theory of investment, one that is startlingly relevant today. He explains why the American economy has experienced periods of debilitating inflation, rising unemployment, and marked slowdowns-and why the economy is now undergoing a credit crisis that he foresaw. Stabilizing an Unstable Economy covers: The natural inclination of complex, capitalist economies toward instability Booms and busts as unavoidable results of high-risk lending practices "Speculative finance" and its effect on investment and asset prices Government's role in bolstering consumption during times of high unemployment The need to increase Federal Reserve oversight of banks Henry Kaufman, president, Henry Kaufman & Company, Inc., places Minsky's prescient ideas in the context of today's financial markets and institutions in a fascinating new preface. Two of Minsky's colleagues, Dimitri B. Papadimitriou, Ph.D. and president, The Levy Economics Institute of Bard College, and L. Randall Wray, Ph.D. and a senior scholar at the Institute, also weigh in on Minsky's present relevance in today's economic scene in a new introduction. A surge of interest in and respect for Hyman Minsky's ideas pervades Wall Street, as top economic thinkers and financial writers have started using the phrase "Minsky moment" to describe America's turbulent economy. There has never been a more appropriate time to read this classic of economic theory.
3,031 citations
"Lessons from the global financial c..." refers methods in this paper
...This Great Stability carried the seeds of its own destruction: as analysed and predicted by Hyman Minsky, stability bred complacency, excessive risk taking and, ultimately, instability (Minsky (1986, 2008))....
[...]
Book•
01 Jan 2009
TL;DR: In this paper, Akerlof and Shiller reassert the necessity of an active government role in economic policymaking by recovering the idea of animal spirits, a term John Maynard Keynes used to describe the gloom and despondence that led to the Great Depression and the changing psychology that accompanied recovery.
Abstract: The global financial crisis has made it painfully clear that powerful psychological forces are imperiling the wealth of nations today. From blind faith in ever-rising housing prices to plummeting confidence in capital markets, "animal spirits" are driving financial events worldwide. In this book, acclaimed economists George Akerlof and Robert Shiller challenge the economic wisdom that got us into this mess, and put forward a bold new vision that will transform economics and restore prosperity.
Akerlof and Shiller reassert the necessity of an active government role in economic policymaking by recovering the idea of animal spirits, a term John Maynard Keynes used to describe the gloom and despondence that led to the Great Depression and the changing psychology that accompanied recovery. Like Keynes, Akerlof and Shiller know that managing these animal spirits requires the steady hand of government--simply allowing markets to work won't do it. In rebuilding the case for a more robust, behaviorally informed Keynesianism, they detail the most pervasive effects of animal spirits in contemporary economic life--such as confidence, fear, bad faith, corruption, a concern for fairness, and the stories we tell ourselves about our economic fortunes--and show how Reaganomics, Thatcherism, and the rational expectations revolution failed to account for them.
Animal Spirits offers a road map for reversing the financial misfortunes besetting us today. Read it and learn how leaders can channel animal spirits--the powerful forces of human psychology that are afoot in the world economy today.
1,460 citations
Book•
02 Jul 2009TL;DR: The authors argue that actions that banks take to make themselves safer can undermine the system's stability and propose counter-cyclical capital charges to counter the natural decline in measured risk during booms and its rise in subsequent collapses.
Abstract: Today's financial regulatory systems assume that regulations which make individual banks safe also make the financial system safe. The eleventh Geneva Report on the World Economy shows that this thinking is flawed. Actions that banks take to make themselves safer can - in times of crisis - undermine the system's stability. The Report argues for a different approach. What is needed is micro-prudential (i.e. bank-level) regulation, macro-prudential (i.e. system-wide) regulation, and careful coordination of the two. Macro-prudential regulation in particular needs reform to ensure it countervails the natural decline in measured risk during booms and its rise in subsequent collapses. "Counter-cyclical capital charges" are the way forward; regulators should adjust capital adequacy requirements over the cycle by two multiples - the first related to above-average growth of credit expansion and leverage, the second related to the mismatch in the maturity of assets and liabilities. Changes to mark-to-market procedures are also needed. Macro- and micro-prudential regulation should be carried out by separate institutions since they differ in focus and expertise required. Central Banks should be tasked with macro-prudential regulation, Financial Services Authorities with micro-prudential regulation. Improved international coordination is also important. Since financial and asset-price cycles differ from country to country, counter-cyclical regulatory policy needs to be implemented mainly by the "host" rather than the "home" country.
1,116 citations