What This Financial Crisis Tells Us

The significance of the current financial crisis is huge, and its policy implications are manifold - and one of those is that we need to learn from previous crises. I recently heard one leading central banker saying that the depth and magnitude of this crisis could hardly have been predicted a year ago. His is not an isolated voice. But their remarks should be a surprise, for it is the job of a central banker to focus on the health of the financial system, and not just the stability of prices. There have been various crises over the past decade and there are people who learned from them. Some financiers and economists - such as Warren Buffett, Edward Gramlich, Paul Krugman, Alexander Lamfalussy, Nouriel Roubini, Paul Volcker - warned another crisis was in the making, underlining the menace posed to financial stability by new types of financial innovation. Studies of the Bank of International Settlements and the Bank of England had examined roots of the current crisis before it erupted. I would add here reports of the European Parliament (one in 2002, in particular) that pointed the finger at issues that are being widely debated these days.