The Role of the Safety Net in the Financial Crisis

It is a pleasure to join you here for this year’s Asian Banker Summit. We convene at a time of recovery from the financial crisis that began in the summer of 2007. There is a broad consensus that serious shortcomings in the financial system and the way that system is regulated have been revealed. There is little consensus, however, on the nature of those shortcomings.1 In my remarks today, I would like to look back at the origins of the crisis and try to illuminate the fundamental causes of the financial market turmoil of the last two years. This look back is warranted, I believe, because careful diagnosis of the forces that brought us to where we are is critical to designing appropriate long-term responses. Proposals for the reform of financial regulations seem to be springing up everywhere these days – like green shoots. But without a clear understanding of why the crisis unfolded as it did, we run the risk of repeating the mistakes of the past, or, worse yet, adopting reforms that make the system less stable.