2
Financial Innovation, Regulation and Crises in History
Another point worth making is that economic crises, which are associated with banking crises, are significantly worse: the impact on the real economy is harder and lasts longer. Turning to the second issue – who is to blame? – several culprits can be and have been advanced: corporate governance, regulators, central banks, governments and markets. However, there is certainly no consensus on the relative importance of these different actors and factors. This is not just bad news; it shows the importance of further research in understanding which circumstances different factors are likely to play a more prominent role in. Corporate governance has been a fashionable issue for many years now. As human beings, including those working in financial institutions, are at least partially driven by greed, good corporate governance is important. The theme resurfaces in a number of chapters in this volume. Lodewijk Petram discusses the merits and limits of self-governance in relation to contract enforcement on the Amsterdam stock exchange in the seventeenth century (Chapter 2). Joke Mooij highlights the somewhat alternative governance culture in cooperative banking (Chapter 3). Regulation too is a recurring theme here. It is important to clarify what purpose regulation is supposed to serve: are there prudential reasons, or re-distributional ones, or is it a moral issue? Central banks have shared substantially in the blame for the current crisis, especially in view of their easy money policies. These have fuelled the traditional credit cycle, with booms and busts in the real estate sector. Finally, as history demonstrates, the respective roles of governments and markets in this as in any financial crisis merits close scrutiny. Normally crises lead to a swing in the pendulum, resulting in more government intervention or in a greater role for market forces. The present crisis, however, has exposed serious problems both in the ability of governments and in the capabilities of markets to deal with such crises. Governments, in part due to financial innovations, were not able to control markets; and markets failed to control governments and allowed sovereign borrowing to increase. The current financial crisis begs the question: could it have been foreseen, let alone prevented? Many may have been aware that a crisis was coming, but very few – be it academics, bankers or policymakers – could have predicted its scale. Among the few people who are considered the Cassandras who warned of the coming crisis, one might single out Nouriel Roubini, Alexandre Lamfalussy and Bill White. Typical for all three of them was a wider historical perspective. Roubini’s and Lamfalussy’s experience has been marked by the Latin American debt crisis of the early 1980s. White was very much under the impression of the Japanese experience of the 1990s. This broader historical approach has allowed them to take a step back. The three were marked by extreme experiences whereby
