COMMENT A buoyant stock market and glimmers of recovery are dispelling many of the more dire scenarios for the economy. Despite the intensity of the financial storm that has just passed, there appears to be a waning resolve to address the larger lessons learnt about systemic risk. Policymakers, perhaps out of a sense of misplaced optimism, seem increasingly ready to concede the inevitability of future bubbles and a status quo approach to their handling – that is, leaving it to existing regulators. We need more.
We believe there is a clear lesson from this latest crisis. It is that we must face this “inevitability of speculative excess” with a process that is much more comprehensive and rigorous. There are three critical components: the foresight to identify risks as they develop, the skill and authority to implement appropriate risk mitigation and, when all else fails, a process for the orderly winding down and resolution of fading institutions.
