Can we escape boom and bust?
Richard Portes explains how risk in the financial system can escalate and how you might avoid disaster
It’s not surprising that governments, policy-makers, analysts and market participants devote considerable time and energy to trying to predict the possible causes of the next crisis, then try to forestall them. Financial crises are very costly, as became evident in the aftermath of the global financial crisis (GFC) of 2008-09. Typically, crisis-hit countries lose 5-20% of GDP, and the growth path falls, so the loss is permanent.
But trying to predict the next crisis is a dangerous game – not least because doing so can feed a sense of panic… and that fuels a crisis.
We know that certain institutional arrangements pose greater threats than others, and there is a role for regulatory policy in trying to channel financial innovation in ways that leave the global economy less vulnerable to financial collapse.
And financial crises are less likely in a stable macroeconomic environment for financial markets, especially in an increasingly interconnected global economy. Monetary, fiscal and regulatory policies have a key role here.
In the decade following the GFC, we have seen meaningful reforms to the financial regulatory environment, and particularly the role of banks. Many commentators believe the reforms have fundamentally improved the resilience of the financial system.
