At the LSE, a supergroup of economists considered what we can learn from the crisisby Jessica Abrahams / March 26, 2013 / Leave a comment
If there were such a thing as a supergroup of economists, this would be it. Ben Bernanke, chairman of the US Federal Reserve, Mervyn King, governor of the Bank of England, Larry Summers, former US secretary of the Treasury, Olivier Blanchard, chief economist of the International Monetary Fund, and Axel Weber, former head of the Bundesbank and now chair of UBS, gathered at the London School of Economics yesterday to discuss: “What should economists and policymakers learn from the financial crisis?” It’s an ambitious question and one that calls for Mervyn and the Monetarists to answer it.
King started out with a warning. “The crisis is far from over,” he said. “There will be many twists and turns before we can truly say that the crisis is over.” All the speakers were keen to stress how the situation in Cyprus shows we are not yet in the clear. “The rally in financial markets that we have seen has been a misleading signal,” Weber said. “Cyprus is a reminder that the eurozone economies have not been stabilised,” and the rally in sentiment was “too good to be true.”
This caution was apt, given a second theme of the afternoon: that economists had been complacent before the crisis. Blanchard saw it as a challenge to the received wisdom that “financial crises were not going to happen anymore—at least not in developed nations, and of course we see the irony of that now”—an echo of Anne Applebaum’s article (£) in this month’s Prospect.
Was there anything special about this particular crisis? Bernanke argued that, “despite its many exotic features, [it] was in fact a classic financial panic—a systemwide run of ‘hot money’ away from assets whose values suddenly became uncertain… The response to the crisis likewise followed the classic prescriptions.” But he admitted that this classic panic “took place in a novel institutional context”—for example, in the US, run pressure was experienced not only by banks but by a diverse collection of institutions, and “the complexity of globalised financial institutions and markets made it difficult to predict how the crisis might spread or to coordinate the response.” Blanchard, too, spoke of the “complexity of the cross-border nature of the crisis.” Countries that thought…