Financial stability in abnormal times

Normally, one would say “yes.” The kind of full-blown systemic global financial crisis that erupted a decade ago is not like a typical septennial recession. The much lower frequency of systemic crises reflects two realities: policymakers respond with reforms to prevent their recurrence, and it normally takes investors, consumers, and politicians a long time to forget the last one.

Unfortunately, we don’t live in normal times. Crisis management cannot be run on autopilot, and the safety of the financial system depends critically on the competence of the people managing it. The good news is that key central banks still, by and large, have excellent staff and leadership. The bad news is that crisis management involves the entire government, not just the monetary authority. And here there is ample room for doubt.