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Looking Forward from the Crisis of 2007-2008

Michael D.BordoRutgers University

Panel session “Where do Central banks go from here?”Norges Bank symposium

“What is a Useful Central bank?”Oslo Norway November 18,2010.

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Introduction

• After the crisis do central banks need to change the plot?

• Before answering the question some historical background may be relevant.

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Global financial crises

• The World has had 6 global financial crises since 1880

• Research with John Landon Lane using cluster analysis on several chronologies on banking crises shows crises in 1890 1907, 1914, 1930-33, 1982, 2007-2008.

• Global FCs involve many countries in 2 or more regions

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1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 20100

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10

15

20

2 year moving sum of Banking Crisis Frequencies

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Global Crises

• In terms of crisis incidence the recent crisis was comparable to the Great depression

• But not in terms of output loss where it is comparable to 1907

• A bellweather of a global FC is US involvement

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Global Financial Crises

• This reflects its size and fragile banking system

• Recent crisis not as bad as it could have been because CBs learned to be LLRs, automatic stabilizers, and we left the gold standard

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The future

• Where should CBs be going?

• History teaches us that CBs learned to provide a credible nominal anchor

• To provide macro stability

• Flexible inflation targeting useful framework

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The future

• CBs should also serve as LLRs to the money market

• Preferable to use OMO rather than DWL

• If DWL used then loans only to solvent banks. No bailouts

• CB to protect payments mechanism

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The future

• CBS should not lean against the wind of asset bubbles

• But if big bust threatens real economy non monetary policy tools should be used.

• Strong case for separating monetary policy from financial stability policy

• Canadian experience shows good mix between monetary policy and FS policy

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The future

• Financial regulation should be based on providing incentives to private sector to take prudent actions

• Capital important to financial stability.