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New Theories to Underpin Financial Reform

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As Carmen Reinhart and Kenneth Rogoff remind us in the title of their book, This Time is Different: Eight Centuries of Financial Folly, financial crises are nothing new (Reinhart and Rogoff (2009)). However, they often come as a surprise to many people because in most countries they appear only periodically.

The current crisis has come as a particular shock partly because it has been over seventy years since the Great Crash of 1929 and the Great Depression that followed. There have been crises in many other parts of the world in the last few decades. Many of these were in emerging or middle income countries such as Argentina, Mexico, and Turkey, but not all. The crises in Japan, Scandinavia and Asia in the 1990’s stand out as being particularly severe. However, these crises had little impact on mainstream economics. Despite being the second largest economy in the world and the large severity of the shock, the Japanese experience during the 1980s and 1990s was very little studied by macroeconomists.1 The Asian crisis of 1997 was studied by international economists but much of their focus was on currency crises. The Scandinavian crises did not receive much attention. Banking crises were little studied in major economics departments and the design of financial regulation to prevent them and ameliorate their effects was regarded by most economists as an anachronism.