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Of Prancing Horses and Bolted Stable Doors: Financial Crisis, Recession, and Policy

Of Prancing Horses and Bolted Stable Doors: Financial Crisis, Recession, and Policy. CAO Challenge Day 20 th February 2012. A Generational Perspective. The evolution of economic thinking can be illustrated through the experience of successive generations:

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Of Prancing Horses and Bolted Stable Doors: Financial Crisis, Recession, and Policy

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  1. Of Prancing Horsesand Bolted Stable Doors:Financial Crisis, Recession, and Policy CAO Challenge Day 20th February 2012

  2. 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” (1979-2007); • Their grandparents – “the managed economy” (1945-1973)

  3. “Greed is good”

  4. EVOLUTIONARY LIBERALISM: FROM POWER TO PLENTY? Lt. Gen. Mikhail Kalashnikov with vodka (20th September 2004)

  5. Prudential Ratios in Banking

  6. 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 Two Hypotheses on finance

  7. “You stupid boy!”

  8. and Ben Bernanke. The central bank response has differed globally. Figure 4. Central Bank Discount Rates, Now vs Then (7 country average) MONETARY POLICY I: INTEREST RATE

  9. MONETARY POLICY II: QE

  10. EUROPEAN FINANCIAL REGULATION: BETWEEN EMH AND FIH Source: Committee of European Banking Supervisors Annual Report 2004.

  11. 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?

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