This excerpt on evaluating and responding to financial crises with new regulations caught my attention:
It is natural for a new president, taking office during an economic crisis, to want to emulate the extraordinary accomplishments of Franklin D. Roosevelt’s first months. Within what seemed the blink of an eye, the banking crisis was resolved, millions were hired into public-works jobs and economic output rose sharply. But that was 76 years ago, and the federal government has since grown fat and constipated. The program set forth in the new Treasury report, heavy on structural change, could take decades to put into effect.He then goes on to critique the report and proposes a few ideas for future financial regulation and reorganization. A few thoughts/questions came to mind after reading his op-ed, especially the two paragraphs above.
The report is premature because there hasn’t been time to study causes of the current crisis in depth — and until these causes are determined we won’t know how to prevent a recurrence. We need some counterpart to the 9/11 commission’s investigation of a previous unforeseen disaster.
Our financial regulations seem to be mostly reactive to previous crises. Most if not all regulations come in the wake of a crisis as a response to the causes of that crisis. These regulations assume that future crises look eerily similar to past crises and thus implementing regulations aimed at repairing previous problems in the financial system will prevent these crises in the future. The fact that financial crises still happen provides three possible conclusions: 1) either future crises are not the same as past crises and thus regulations that are implemented to solve the problems associated with past crises are useless (they may be useful at preventing the same crisis from occurring again, but not at preventing future crises - which seems to be the main goal), 2) we are not very good at identifying the causes and lessons of past crises and thus have not yet identified the ways to remedy the structural problems that bring about these crises, or 3) we know what the lessons and causes of these crises are, but we just can't figure out how to tackle them and the regulatory reforms that we have put forward in the past, simply have not worked.
If future crises are the same as past crises, then we should be able to put together a typical blueprint for a financial crisis, including reasons why they begin, timing, and most effective responses. I point you to Frederic Mishkin's "The Anatomy of a Financial Crisis" which he published back in 1991 with (I think) this goal in mind. The paper does a good job at analyzing financial crises cross-sectionally and temporally. But, can we break down financial crises into there primary and secondary components like we can the human anatomy, and see how each piece works by itself and how they then interact with the other pieces? I don't think we can. I don't think it's possible to put together a blueprint of a typical crisis and thus create a basic foundation from which to evaluate all future crises.
Posner calls for more time to study and evaluate the causes and lessons of the Great Recession of 2007-2009. I definitely agree that many more studies of the causes of the crisis are needed (one of the reasons is because it gives me an interesting topic to research and write about and hopefully publish!), and we also need studies evaluating the effectiveness of the emergency measures taken by the federal government and the Federal Reserve as the crisis was unfolding. However, I'm a bit skeptical of his proposition that more time to study this crisis will greatly enhance our ability to regulate our way into preventing a future crisis. With absolutely zero data to back this up, I think all crises are fundamentally different, with different actors and different causes. I think we're oversimplifying financial crises if we think that they are all the same and that there is one magical package of regulations that have the power to prevent all future ones.