How not to solve a financial crisis

Abstract

Abstract In what ways can there be a learning from the past in the case of financial crises? A short-run assessment looks frequently different to a longer retrospective: policies that once appeared to be the best available turn out to be counter-productive. The article tackles this issue by examining three iconic and world-changing cases of financial crisis: 1931, 1997 and 2008. In each, it looked at first as if there was a substantial success, because the measures adopted corresponded to conventional wisdom. But those immediate responses, in each case driven by the sense that past mistakes needed to be avoided, in the end unfortunately set the stage for a new set of problems, and thus for the next crisis. Even though multilateral solutions might have been the best answer, the concrete dynamics of responding to crises politically produces national solutions, which may drive a nationalization of politics. The immediate and conventional solutions did not adequately deal with the social and political fallout from increasing disillusion with the way that the solutions are applied, and with the (in part) unintended consequences they produce. The side-effects of anti-crisis medicine are thus unpleasant and liable to generate new tensions.