Charles Goodhart (2011) in his
paper on the emergence of a new form of financial regulation argues that regulation
policy has traditionally been ‘reactive
and backward thinking’, focused solely on the prevention of factors which triggered
the last crisis as opposed to looking towards the future in anticipation of the
next one. If this is the case then perhaps regulatory bodies need to take a further
step back and look not just at what triggered the last crisis but what regulatory failures have led to a long history of banking crises.
Reinhart and Rogoff’s book ‘This Time is Different’ (2008) looks at eight centuries of financial woe, starting with Edward II’s default in 1340 brought about by the Kingdom of England’s on going war with France. In fact going back to the origins of finance, it appears financial crises have always existed. Why is it then that policy makers and regulators around the world still emphasise crisis prevention as their ultimate aim when history shows us that whatever new and improved reforms are made to the financial system, ultimately there will always be another crisis?
The Following diagram comes from the aforementioned book. Looking at the blue line gives some idea of the stubborn presence of banking crises over the last 200 years:
Reinhart and Rogoff’s book ‘This Time is Different’ (2008) looks at eight centuries of financial woe, starting with Edward II’s default in 1340 brought about by the Kingdom of England’s on going war with France. In fact going back to the origins of finance, it appears financial crises have always existed. Why is it then that policy makers and regulators around the world still emphasise crisis prevention as their ultimate aim when history shows us that whatever new and improved reforms are made to the financial system, ultimately there will always be another crisis?
The Following diagram comes from the aforementioned book. Looking at the blue line gives some idea of the stubborn presence of banking crises over the last 200 years:
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| Source: Reinhart and Rogoff (2008) - image from www.debtnation.org |
Over the next few weeks in this
blog I hope to show how the cycle of expansion, climax, failure and finally re-design
exists within all complex systems on the planet and the financial industry is no
exception. I aim to show how the pervasive acceptance of the inescapable nature
of banking crises is therefore necessary for a new approach to regulation to
emerge, one that will make economies better equipped to deal with these crises
when (not if) they occur. Only in such an environment will regulatory
frameworks be designed to deal with the onset of crises as opposed to
implementing inadequate controls designed to somehow magically avoid the unavoidable.
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