1 Looking Forward from the Crisis of Michael D.Bordo Rutgers University Panel session “Where do Central banks go from here?”Norges Bank symposium “What is a Useful Central bank?” Oslo Norway November 18,2010.

2 Introduction After the crisis do central banks need to change the plot? Before answering the question some historical background may be relevant.

3 Global financial crises The World has had 6 global financial crises since 1880 Research with John Landon Lane using cluster analysis on several chronologies on banking crises shows crises in , 1914, , 1982, Global FCs involve many countries in 2 or more regions

4 2 year moving sum of Banking Crisis Frequencies

5 Global Crises In terms of crisis incidence the recent crisis was comparable to the Great depression But not in terms of output loss where it is comparable to 1907 A bellweather of a global FC is US involvement

6 Global Financial Crises This reflects its size and fragile banking system Recent crisis not as bad as it could have been because CBs learned to be LLRs, automatic stabilizers, and we left the gold standard

7 The future Where should CBs be going? History teaches us that CBs learned to provide a credible nominal anchor To provide macro stability Flexible inflation targeting useful framework

8 The future CBs should also serve as LLRs to the money market Preferable to use OMO rather than DWL If DWL used then loans only to solvent banks. No bailouts CB to protect payments mechanism

9 The future CBS should not lean against the wind of asset bubbles But if big bust threatens real economy non monetary policy tools should be used. Strong case for separating monetary policy from financial stability policy Canadian experience shows good mix between monetary policy and FS policy

10 The future Financial regulation should be based on providing incentives to private sector to take prudent actions Capital important to financial stability.