Transcript Of Prancing Horses and Un

Of Prancing Horses
and Bolted Stable Doors:
Financial Crisis, Recession, and Policy
CAO Challenge Day
20th February 2012
A Generational Perspective
The evolution of economic thinking can be illustrated through
the experience of successive generations:
• Today’s young adults - “the return of
depression economics” (2007-??)
• Their parents - “the end of history” (19792007);
• Their grandparents – “the managed economy”
(1945-1973)
“Greed is good”
EVOLUTIONARY LIBERALISM: FROM POWER TO PLENTY?
Lt. Gen. Mikhail Kalashnikov with vodka (20th September 2004)
Prudential Ratios in Banking
Assets
Liabilities
Liquidity Reserves
Deposit Liabilities
Government Securities
Non-Deposit Liabilities
Loans
Equity (Shareholders’
wealth.
Two Hypotheses on finance
• Efficient Markets
– Finance “oils the wheels”
of the market
– It speeds up income
convergence at lower
cost in current
consumption
– Rational expectations
ensure stability
– Competition empowers
rational expectations
• Financial Instability
– Expectations
intrinsically volatile
– Volatility creates real
economic damage
– This damage can be
long-lasting
(hysteresis)
– Prudential regulation
must be strict
“You stupid boy!”
MONETARY POLICY I: INTEREST RATE
MONETARY POLICY II: QE
EUROPEAN FINANCIAL REGULATION: BETWEEN EMH AND FIH
Source: Committee of European Banking Supervisors Annual Report 2004.
CONCLUSIONS
• The biggest negative shock since the 1930’s
• Was initially met by a much bolder macroeconomic
response
• Leading to a faster recovery than anticipated
• But “the markets”, missing “sound finance”, are
gunning for Greece and other Eurozone members;
• Policy-makers may be losing their nerve:
• Can Keynes still be the “defunct economist ...
academic scribbler” to enslave them/inspire
you/revive public governance?