The Global Financial Crisis: Lessons
Learned, Lessons Already Forgotten?
Alexander K. Swoboda
Presentation prepared for the Panel on China and the Global
Financial Crisis; Implications and Future Perspectives
Shanghai, May 27 2013
Outline
I.
II.
III.
IV.
The Crisis: global, pervasive, lingering
A different financial system?
A major threat to international financial
(and economic) stability: Exit in a still
fragile financial sytem
What, if anything, have we learned?
I. The Crisis: global, pervasive, lingering

After the great moderation, the crisis came as a shock. Some
had begun believing that the moderation was due to 70% policy
(especially monetary) skill, 20% improved structure and 10%
luck. (vs. 1/3,1/3,(1/3).

Its propagation revealed that financial system had become
increasingly global, interconnected geographically and across
markets but, at the same time, increasingly complex and opaque.

It also confirmed that regulation was highly pro-cyclical: it tended
to amplify rather than dampen macro shocks and credit cycles.

And it led to questioning the benefits of financial
innovation/integration, sometimes sensibly, sometimes in populist
unhelpful fashion. In a deeper sense, it became a crisis of
confidence and trust in finance, its organization and public policy.
II. A different financial system?
 The post-crisis financial system: what has changed?
•
•
•
More concentrated rather than less
More fragmented (cf. Eurozone)
From private to public debt, from bank to sovereign doom loop
 Some progress in regulatory policy
•
•
•
Attention paid to procyclicality / macroprudential policy
Some moves towards coordination (e.g towards a single supervisory mechanism
in the Eurozone but well short of a true banking union), etc.
Move towards simple non risk weighted leverage ratios and some progress on
anti-cyclical buffers
 But fundamental problems remain:
•
•
Too big to fail – too large to save: little progress
Lack of fiscal space in short run and consolidation in medium to long run
III. Exit in a fragile financial system
 The more highly leveraged a financial system, the more
interconnected and the more opaque, the more fragile that
system . (Fragmentation / interconnectedness paradox).
 With no action on the fiscal front, with macroprudential still far
away, monetary policy is overburdened and conflicted. The exit
from QE and UCMP becomes particularly delicate.
 Worse, any interest rate spike, whatever its source threatens a
financial crisis.
 The current system is still fragile and leverage is increasing. So
are lending and margin chains making the management of
counterparty risk at a system level problematic. The “we are
fully hedged” syndrome.
III. Exit in a fragile financial system (continued)
 There is evidence that (i) intermediation chains in the shadow
banking system are increasing again (cf. securitization and
collateral chains), which combined with a search for yield,
threaten to provoke asset price collapses if a shock decreases
the value of assets in those chains and leads to a rolling
sequence of margin calls.
 Some hints:
 Stocks purchased on margin on the NY stock exchange
•
End March 2013: USD 379.5 billion
• July 2007 record: USD 381.4 billion
 Three figures from the 2013 U.S. Financial Stability Oversight
Council
III. Exit in a fragile financial system (continued)
 The dilemma is that you are damned if you do and
damned if you don’t:
• If interest rates are not raised, leverage and thus fragility
increase, making any future tightening more costly and
threatening to stability
• It also makes the system more fragile to any shock to
interest rates whether policy induced or resulting from
increased risk aversion or what have you
• Not to mention the hysteresis effects of persistent low
interest rates, including effect on pension fund balance
sheets and possibly solvency
• If interest rates are raised or rise “too fast” the sensitivity of
the system to any spike in rates may be so high that a crisis
ensues
IV. What, if anything, have we (or should we have)
learned?
 Crisis has brought a number of central issues to the fore:
•
•
•
•
•
Pro-cyclicality of credit cycles, of leverage and of much regulation
Complexity and opaqueness (risk management issues)
Too big to fail
Policy inaction or delay (kicking the can down the road)
Instrument shortage: Obstfeld’s trilemma and the burden on
monetary policy.
 We know what we need to do, why don’t we do it?
 A political economy or politics problem
 It’s never a good time to reform
 Distributional issues including political power
What, if anything, have we (or should we have) learned? (concluded)
 Some simple lessons for policy:
• Ask of every regulation whether it is pro or anti-cyclical. Contingent
rules important; discretionary policy too often leads to inaction
• Regulations should be as simple and few as possible. This means
concentrating on essentials. (Haldane). Dodd-Frank!
• Too big to fail: cf. Richard Fischer, too small to fail
• Act quickly (related to but not equal to big bang vs gradualism)
• Attack problems at source (not only Tinbergen principle but also
Mundell’s assignment prescription) to avoid unwanted side effects
and instabilities
What, if anything, have we (or should we have) learned? (concluded)
 All this is easier said than done especially in a world that is
getting more integrated and interconnected but where many
distortions subsist. With greater factor mobility the overall cost of
such distortions is likely to increase—and so may the likelihood
of financial instability.
And, more fundamentally, there is no easy recipe to resolve the
tension between increasingly interconnected financial markets
and a fragmented policy and political world.