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Symposium 2011

Proposal - We must pay much more attention on economic and financial history than we have done before

The Challenge

The global financial crisis has revealed how systemic risk in the banking system can lead to huge economic downturns. Many of the problems leading to the crisis have been discussed and many suspects h ...

The global financial crisis has revealed how systemic risk in the banking system can lead to huge economic downturns. Many of the problems leading to the crisis have been discussed and many suspects have been identified (including investment banks, central banks, rating agencies, regulators and the economics profession).

The latest financial crises showed, once again, that "this time is not different". Many of the excesses and policy mistakes that contributed to the crisis could possibly have been avoided or at least alleviated if we had learnt and remembered the lessons of the history better.

According to the history of financial crises, there are several common features in the most severe crises. The biggest crises are usually preceded, among other things, by excessive lending, leverage and maturity transformation, widespread risk illusion, ignorance of tail risks and group-thinking.

How to avoid repeating making the same mistakes over and over again? In addition to a better regulation and policy, we must change some of our former ways of thinking.

First, the amount of economic history in economics studies should be increased. The economics profession has paid insufficient attention to economic history in its emphasis of analytical rigour.

Second, we should recognize the dangers of group thinking in financial institutions, supervisors and central banks. In all of these, critical views should be tolerated and supported.

Third, we should accept that there is no free lunch in financial stability. If we want more stability, then we have to get on with less profitability, less efficiency and more intrusive regulation.

Fourth, we should never again compete with other countries about whose financial sector is the biggest (with respect to GDP etc.) or grows at the fastest pace. Rather, a success in this competition should be regarded as a warning sign.

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