{
  "title": "Preventing The Next Catastrophe: Where Do We Stand?",
  "publication": "IMF Blog, May 3, 2013",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2013/05/03/preventing-the-next-catastrophe-where-do-we-stand",
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  "summary": "Author: David Romer",
  "sections": [
    {
      "heading": "Introduction",
      "content": "- Author: David Romer\n- Date: May 3, 2013\n- Framing:\n  - Two perspectives on a conference: intellectual (provocative questions, stimulating discussion) and practical (averting another financial and macroeconomic disaster).\n  - Assessment: intellectually successful; practically inadequate—modest changes are helpful but unlikely to prevent future large financial shocks."
    },
    {
      "heading": "Financial sector as a continued source of shocks",
      "content": "- Key empirical claim:\n  - For the United States over the past thirty or so years, there have been \"six distinct times\" when financial developments posed important macroeconomic risks.\n    - Outcomes across those six episodes:\n      - In three of them, the risks were largely averted and the costs ended up being minor.\n      - In two, the costs were modest to moderate.\n      - In one, the damage was enormous.\n- Illustrative episodes (as described):\n  - Volcker disinflation episode: severe recession + banks’ exposure to Latin American debt; last-minute policy turn and regulatory forbearance averted systemic collapse.\n  - 1987 stock market crash: rapid Fed responses prevented large damage.\n  - Savings and loan crisis (late 1980s/early 1990s): misallocation of investment, impaired lending, fiscal costs from bailout.\n  - 1998: Russian debt crisis and collapse of Long-Term Capital Management (LTCM); arranged rescue and lower rates preserved stability.\n  - Dot-com bubble and bust (late 1990s/early 2000s): misallocation of investment and recession.\n  - Recent housing-price collapse and financial meltdown: catastrophic effects.\n- Cross-country examples and variety of shocks:\n  - Iceland and Cyprus: shocks from vastly expanded banking sectors with huge foreign deposits.\n  - Greece: disguised fiscal profligacy.\n  - Classic sudden stops.\n- Conclusion on frequency and predictability:\n  - Financial shocks are likely to be both frequent and hard to predict — not just in timing but in form.\n  - Only two episodes on the illustrative list (dot-com and the recent crisis) are ex post reasonably called bubbles."
    },
    {
      "heading": "Small-scale solutions",
      "content": "- Two small-scale policy approaches evaluated:\n  - Using the short-term policy rate to address financial imbalances:\n    - Characterized as largely a \"nonstarter.\"\n    - Reasons: policy rate is too crude, affects all markets, conflicts with other objectives, direction of adjustment often unclear.\n    - Potential benefit described as at best marginal.\n  - Macroprudential policies and capital account management (\"wise central banker\" or \"Whac-a-Mole\" strategy):\n    - Targeted regulations and interventions to address developing problems (e.g., targeted mortgage regulations in a city).\n    - Positive assessment: useful addition to the policy toolkit; examples cited include Israel, South Korea, and Brazil.\n    - Limitation: given the enormous range of potential shocks, relying on rapid, targeted policymaker interventions is \"surely wishful thinking.\""
    },
    {
      "heading": "Deeper solutions on the financial side",
      "content": "- Goal: reform the financial system so shocks sent to the real economy are much smaller.\n- Promising micro-regulation approaches mentioned:\n  - Stronger capital and liquidity requirements.\n  - Special rules for institutions that create more systemic risk.\n  - Restrictions on form or capabilities of financial institutions (examples: ring fencing in the United Kingdom; the Volcker rule in the United States).\n- Limitations of modest reforms:\n  - Shadow financial institutions may escape rules.\n  - Rules can be gamed.\n  - Shocks can overwhelm moderate changes.\n- Four examples of much larger reforms that received little serious consideration:\n  - Very large capital requirements:\n    - Historical note: Allan Meltzer mentioned that at one time \"25 percent capital\" was common for banks.\n    - Question posed: Should we be moving to such a system?\n  - Redesign of debt contracts:\n    - Amir Sufi and Adair Turner identified features of debt contracts that make them inherently prone to instability.\n    - Question posed: Should policy promote more indexation of debt contracts, more equity-like contracts, and so on?\n  - Simplification of the financial system:\n    - Observation: costs imposed by the modern financial system on the real economy may not be justified by benefits.\n    - Question posed: Might a much simpler, \"1960s- or 1970s-style\" financial system be preferable?\n  - Pigovian-style taxation of financial activity:\n    - Rationale: negative externalities from certain financial activities or structures.\n    - Question posed: Should there be substantial taxes on aspects of the financial system (options listed: debt, leverage, size, other indicators of systemic risk, a combination, or something else)?\n- Author stance: does not claim answers but argues these ideas \"deserve serious analysis\"; notes radical redesign was largely missing from the conference."
    },
    {
      "heading": "Larger-scale solutions on the macroeconomic side",
      "content": "- Framing: make the macroeconomy more resilient to financial shocks; three policy areas discussed.\n\n- Common currency area (eurozone focus):\n  - Concern: another large asymmetric financial shock in the eurozone could repeat recent painful dynamics.\n  - Assessment:\n    - Some improvement in short-term crisis management capacity.\n    - Little progress toward fundamental changes addressing country-level responsibility for bank insolvency vs. eurozone-level resolution.\n    - Minimal progress on fiscal union and mechanisms to handle large differences in competitiveness.\n\n- Monetary policy:\n  - Observation: inflation targeting was effective for its first fifteen or twenty years but later proved \"incapable of providing aggregate demand at the level ... needed.\"\n  - Suggestion: consider alternative frameworks (example mentioned: targeting a nominal GDP path).\n    - Status: idea mentioned intermittently but debate has not proceeded to serious quantitative analysis of costs and benefits.\n    - Other significant changes to the monetary policy framework have been discussed even less.\n\n- Fiscal policy:\n  - Widely supported idea: desirability of more fiscal space.\n    - Challenge: difficulty of regaining pre-crisis fiscal space; progress has been minimal.\n    - Caveat: fiscal space is not a magic bullet—countries with responsible fiscal policies still suffered terribly in the crisis.\n  - Little discussion of larger fiscal framework changes:\n    - Strengthening automatic stabilizers (for example, macroeconomic triggers for changes in fiscal policy) was not mentioned.\n    - Fiscal rules or constraints:\n      - Possible models: constitutional rule, independent agency, or a combination enforcing responsible fiscal policy in good times and enabling credible temporary stimulus in downturns.\n      - Roberto Perotti and Avinash Dixit raised fiscal rules or councils briefly; idea did not advance further.\n  - Conclusion: limited progress on macro policy reforms strengthens the case for deeper financial reforms but also indicates need for broader macro thinking."
    },
    {
      "heading": "Conclusion and recommendations",
      "content": "- Overall diagnosis:\n  - After five years of catastrophic macroeconomic performance, \"first steps and early lessons\" are insufficient.\n  - Current reform focus is judged too small to prevent similar future crises.\n- Recommended direction:\n  - Pursue more fundamental rethinking of:\n    - The design of the financial system (including consideration of very large capital requirements, structural limits, contract redesign, and Pigovian taxes).\n    - Frameworks for macroeconomic policy (including alternative monetary frameworks, stronger automatic stabilizers, and credible fiscal rules).\n- Urgent call:\n  - Move beyond modest, incremental measures to serious analysis and consideration of larger-scale reforms that could substantially reduce the frequency and severity of future financial shocks.\n\nPreventing The Next Catastrophe: Where Do We Stand? — David Romer, May 3, 2013\n\n---\n\n Content in this bundle\n\n- 防止下次灾难：目前做得如何？ 大卫·罗梅尔\n  - 防止下次灾难：目前做得如何？ 大卫·罗梅尔 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - 防止下次灾难：目前做得如何？ 大卫·罗梅尔 (PDF){rel=\"external\" type=\"application/pdf\"}\n- 次の大惨事を防ぐには： 現状を振り返る; iMF direct ブログ;  寄稿： デビッド・ローマー, カリフォルニア大学バークレイ校, 2013年5月3日掲載\n  - 次の大惨事を防ぐには： 現状を振り返る; iMF direct ブログ;  寄稿： デビッド・ローマー, カリフォルニア大学バークレイ校, 2013年5月3日掲載 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - 次の大惨事を防ぐには： 現状を振り返る; iMF direct ブログ;  寄稿： デビッド・ローマー, カリフォルニア大学バークレイ校, 2013年5月3日掲載 (PDF){rel=\"external\" type=\"application/pdf\"}\n- Предотвращение новой катастрофы: как обстоят дела сейчас?\n  - Предотвращение новой катастрофы: как обстоят дела сейчас? (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Предотвращение новой катастрофы: как обстоят дела сейчас? (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- conference\n\nSource: https://www.imf.org/en/blogs/articles/2013/05/03/preventing-the-next-catastrophe-where-do-we-stand"
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    "Authors: David Romer",
    "Published: May 3, 2013",
    "Author: David Romer",
    "Date: May 3, 2013",
    "Framing:",
    "Key empirical claim:",
    "Illustrative episodes (as described):",
    "Cross-country examples and variety of shocks:",
    "Conclusion on frequency and predictability:",
    "Two small-scale policy approaches evaluated:",
    "Goal: reform the financial system so shocks sent to the real economy are much smaller.",
    "Promising micro-regulation approaches mentioned:",
    "Limitations of modest reforms:",
    "Four examples of much larger reforms that received little serious consideration:",
    "Author stance: does not claim answers but argues these ideas \"deserve serious analysis\"; notes radical redesign was largely missing from the conference.",
    "Framing: make the macroeconomy more resilient to financial shocks; three policy areas discussed.",
    "Common currency area (eurozone focus):",
    "Monetary policy:",
    "Fiscal policy:",
    "Overall diagnosis:",
    "Recommended direction:",
    "Urgent call:",
    "**防止下次灾难：目前做得如何？ 大卫·罗梅尔**",
    "**次の大惨事を防ぐには： 現状を振り返る; iMF direct ブログ;  寄稿： デビッド・ローマー, カリフォルニア大学バークレイ校, 2013年5月3日掲載**",
    "**Предотвращение новой катастрофы: как обстоят дела сейчас?**",
    "[conference](http://www.imf.org/external/np/seminars/eng/2013/macro2/index.htm)"
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