In times of crisis, choices must be made. In the most recent global economic crisis, policymakers moved quickly to stabilize the system, providing massive financial support, which is the right response in the beginning of any crisis. But that only treated the symptoms of the global financial meltdown, and now a rare opportunity is being thrown away to tackle the underlying causes. In our new paper, we analyze the policy choices made during the crisis and compare them to a number of past ones. It turns out the phases of this crisis followed the same pattern as previous ones, but policymakers made different choices this time around. This post lays out the lessons that we should learn.
The crisis exposed fundamental weaknesses in many areas of the world economy, the most obvious being dramatic deficiencies in the regulation and supervision-nationally and internationally-of financial institutions and markets. On the bright side, the crisis provided the impetus for a major overhaul of the financial regulatory system. So, are we making the most of this opportunity to fix the system? A new Staff Position Note, Shaping the New Financial System, examines just how far we’ve come and, more importantly, how much further we have to go. The good news is that policymakers have made important progress in some areas, and the work underway is moving in the right direction. The bad news is that we are barely half way there and the hardest part may lie ahead. Indeed, unless there is concrete progress over the next 12 months in a few key areas, we may well sow the seeds of the next financial crisis.