Foreward
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bust had followed on boom. It made them very reticent to buy-in to the new paradigm of ‘this time it is different’. So, what lessons does history hold? We all know that history does not repeat itself. However, it can contribute to a broader perspective which can help us to see parallels and differences and to identify structural changes. What ‘policy conclusions’ can be drawn from this? We may at least try to avoid the mistakes of the past. Policymakers must find a consensus that can contribute to a more robust, or at least less fragile, economic policy framework. A very basic starting point must be the recognition that banks are inherently risky. Actions in different areas will have to be undertaken or stepped up. Strengthening corporate governance is a clear priority. Also an increase in banks’ capital and liquidity ratio’s figures prominently on the reform agenda. Moreover, a more countercyclical capital ratio framework is required. This should, to a certain degree, have an element of automaticity, while there might also be a role for independent boards. Why was this not done earlier? Surely, different elements have blinded both financial institutions and regulators: (1) banks were happy, as they were accumulating profits; (2) central banks were happy as their primary objective of price stability was, more or less, achieved; (3) like in other booms, there was the (faulty) opinion of ‘this time it is different’; and (4) economic theory was based on analytical frameworks where history was absent and crises could not happen. So explaining, or even acknowledging them, was not possible. Where does all this leave economic and financial history? Personally, I would conclude that the political economy of economic and financial reform merits a very prominent place on the future research agenda of historians and economists alike. The views expressed are those of the author and do not necessarily reflect those of the National Bank of Belgium.
