History Repeating for Economists: An Anticipated Financial Crisis

prisme13Prisme N°13 November 2008

Robert Boyer

Prisme N°13 November 2008 (1.4 MiB)

Finance can contribute to growth through various mechanisms: the transfer ofsavings from lenders to borrowers, the smoothing of investment and consumption profiles over time or again the transfer of risk. Financial innovations have their own characteristics: the result of private profit-seeking strategies, new financial products can spread very fast, because their production process is immaterial. This rapid diffusion can have a significant impact on macroeconomic stability. Financial history shows that the effects of financial innovation, ultimately favourable to growth, materialize through a succession of crises and efforts at regulation to avoid their repetition. Historical analysis, unlike the theories that postulate the stability and efficiency of financial markets, also allows us to detect the emergence of financial crises. The crisis triggered by the subprime mortgage meltdown is no exception. The sequence:
“private financial innovation, diffusion, entry into a zone of financial fragility, open crisis” does not stem from the irrationality of agents’ behaviour. Is it then possible to avoid a financial crisis? Why not apply the same sort of certification procedures to financial innovations as we impose on food products, drugs, cars, public transport, banking and insurance? Up until now, the omnipotence of finance has prohibited any such public intervention.