What Have We Learned From The Financial Crises Of The Last 20 Years? by Federal Reserve
Remarks by
Stanley Fischer
Vice Chairman
Board of Governors of the Federal Reserve System
at
the International Monetary Conference
Toronto, Ontario
June 1, 2015
There have been many economic and financial crises since the Mexican crisis that began in December 1994. Michel Camdessus, then Managing Director of the IMF, called the Mexican crisis “the first economic crisis of the twenty first century” – by which he meant that it was the first emerging market country crisis whose immediate roots were more in the capital account than in the current account of the balance of payments.
The Mexican crisis was followed by the crises of East Asia, including Thailand, Indonesia and Korea that started in the second half of 1997. The crisis also affected Malaysia, which by imposing capital controls and other measures avoided having to enter an IMF program. The current Japanese crisis began in the 1990s, but was not then seen as a possible forerunner of crises among the industrialized countries of North America and Europe.
The problems of East Asia were followed by crises in Russia, Brazil, Turkey and Argentina. All these took place during the Great Moderation, the moderation being the decline in inflation and greater stability of output that occurred in much of the industrialized world. The Great Moderation was ascribed primarily to the switch in many countries to an inflation targeting approach to monetary policy.
The Mexican crisis began within four months of my joining the IMF. I left the Fund at the end of August 2001, and a few months later the string of crises seemed to be drawing to its close after Argentina abandoned the peg of its peso to the dollar. For a few years it seemed that whatever measures had been put in place to deal with the myriad crises had been successful, as the frequency and intensity of crises declined in the first half of the aughts.
And then, in 2008, came the Great Recession and the Great Financial Crisis in the United States – a once-in-a-century event (one hopes), with deep worldwide repercussions. Nearly seven years after the failure of Lehman Brothers, the economies of the United States, Japan, countries within the Euro zone and other European countries who continue to use their own currencies, among them the United Kingdom, are still struggling to return to sustained growth, two percent inflation rates, and positive real central bank interest rates, and thus to leave behind the imprint of the Great Recession.
I. Learning from Financial Crises
Folk wisdom, policymakers and researchers see opportunities in financial crises. Everyone is familiar with the notion that one should never waste a crisis. Jean Monnet, among the founders of the European Union, said that “Europe will be forged in financial crises, and will be the sum of the solutions adopted for those crises.”1 European Union and EMU decision-makers have made similar statements in each of their crises, including the present one. And when talking about the present situation, they often conclude by saying “And we will emerge stronger this time too.”
Policy economists seek to learn from financial crises, so that they can do better next time. During the thirty years from 1985 to 2015, I have been involved in a variety of roles in the management of crises, starting from the successful Israeli stabilization program of 1985, during which I was part of a small team advising then Secretary of State, George Shultz, and through the ongoing management of monetary policy in the United States today, where we are engaged in managing the expected exit from the policies adopted by the Fed to deal with the Great Recession.
This morning I want to talk about major lessons learned from the economic crises of the last twenty years, many of them crises in which I was involved. I draw on three papers on lessons of financial crises that I wrote at different stages during that period. The three papers were written in 1999 (when I was at the IMF), 2011 (when I was Governor of the Bank of Israel), and 2014 (when I had been nominated but not yet confirmed as Vice-Chairman of the Fed.)
The ten lessons presented in each paper are summarized in Table 1. Each lesson is numbered, and each bears a letter: F for the 1999 paper (written when I was at the IMF); B for the 2011 paper, when I was at the Bank of Israel; and S for SIEPR2, where the 2014 paper was presented.
Each of the lists reflects the concerns of the times and circumstances in which it was written. The 1999 paper was written at a time when the IMF was under criticism for its handling of the many financial crises with which it had been confronted since 1994. It was a time of far less transparency than today. For instance, in May of 1997 when I paid a secret visit to Thailand to try to gauge the seriousness of their situation, and asked for data on their international reserves, I was told that I could get them – on condition I not pass them on to anyone else in the Fund. This was an offer I had no difficulty in refusing.
