Lessons learned for monetary policy from the recent crisis

“Most people would say that Europe is still sort of coming out of the financial crisis that we had 5 years ago, which was probably the worst since the Great Depression of 1930s. Now just to keep things in context, at the time people were saying that it was going to be worse than the Great Depression, but it was not. It was big, but it was actually not that big compared to some of the crises, especially compared to what happened in the 1930s.” writes prof. Michael Bordo in the newly published mBank – CASE Seminar Proceedings No. 130. He discusses the lessons learned from the history of previous financial crises for the monetary policy, focusing mainly on the recent experience of the United States (and namely its Federal Reserve), where the current crisis began. He argues that the crisis of 2007-2008 was not as devastating as is commonly believed, and - more importantly – claims that the Fed’s policy during the crisis, based on lessons learn from the Great Depression, not only “did not exactly fit the facts of the recent crisis”, but may in fact have “exacerbated the crisis and may have led to serious problems which could contribute to the next (one)”.