By Anders Åslund
This is the worst global asset bubble and financial panic since the Great Depression of 1929-1933. Still, almost all argue that it cannot become equally bad, because we have learned those lessons.
Analytically, that statement does not hold. True, our policymakers are not likely to repeat the same mistakes of the Great Depression, but they may commit other mistakes. Bank deposit insurance has come to stay for good, but not all advances represent progress, and many create new vulnerabilities.
By John N Muellbauer
When future economic historians look back to trace the triggers for the October 2008 financial panic and the unnecessarily severe recession of 2009, they will likely put their fingers on two.
- The failure to keep Lehman Bros functioning as a going concern.
- The failure of the European Central Bank and the Bank of England to use their interest rate setting firepower to organise a substantial globally co-ordinated interest rate cut (the cut of October 8, 2008 was too timid).
A convincing argument for independent central banks adopting an inflation targeting framework is that, where central banks are forward looking and responsive, they should be able to avoid deflationary slumps. The markets then should expect the central banks to assess clearly the global economic situation and the downside risks, and take decisive action.