Rescue, recovery, reform

The 2008/09 Annual Report from the Bank for International Settlements reflects on the dramatic events affecting the world's financial system and economy over the preceding two years. The essential and complex system of finance has been critically damaged; trust has been lost. There were both macroeconomic and microeconomic causes of the collapse. The former included imbalances in international claims and a long period of low real interest rates, while the latter consisted of problems with incentives, risk measurement and regulation. Some are inherent in human behaviour, while others represented policy failures. There were danger signs that led to warnings; some were accurate, others were not, and most were in vain. It is easy to see why. Understanding the nature of many of the problems would have required a history of events which are by their nature infrequent. And, when the existing policy apparatus appeared to be working so well, making what would have been wholesale changes to the monetary and regulatory policy frameworks in many countries would have presented nearly insurmountable political and intellectual difficulties.