" In post-1945 crises, central banks have strongly supported money growth, and crises have not been accompanied by a collapse of broad money. Whereas financial crisis led to a "deleveraging" of the economy in earlier times, policy actions in the postwar period have effectively prevented episodes of marked balance sheet shrinkage, as Figure 2 illustrates. The bottom line is that the lessons of the Great Depression, once learned, were put into practice. After 1945, financial crises were fought with more aggressive monetary policy responses, banking systems imploded neither so frequently (at least before 1980) nor as dramatically, and deflation was avoided. In the previous era, financial crises led to contractions of the money supply and deflationary pressures, relative to trend, but this is no longer true (this result is not driven by the particular episode of the Great Depression)."
great eh ?
. Response of aggregates after financial crises
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However
"..., on the real economic side,"
" a striking result is that the economic impact of financial crises is no more muted in the postwar era than in the prewar era."!!!!!!!!!!!
"It seems that postwar policy activism was “successful” in preventing financial deleveraging but not in reducing the output costs."
" A cynic might conclude that central banks were successful in bailing out finance but failed to protect the real economy"
". Of course the obvious caveat here is the nature of the counterfactual – given the much larger financial system we have today (the first stylised fact above), the real effects of the postwar regime could take the form of preventing the potentially even larger real output losses that could be realised in today’s more heavily financialised economies without such policies."
" And yet it may be plausibly argued that the postwar ascent (especially since the 1970s) of a regime of fiat-money-plus-lender-of-last-resort could have also encouraged the expansion of credit to occur."
" Aiming to cushion the real economic effects of financial crises, policymakers have effectively prevented the periodic deleveraging of the financial sector seen in the olden days, resulting in the virtually uninterrupted growth of leverage we saw up until 2008."
" Scholars such as Minsky (1977) and Kindleberger (1978) have argued that the financial system itself is prone to generate economic instability through endogenous credit booms"
". In their view, the credit system was not merely a propagator of shocks hitting the economy as in the standard financial accelerator model – it often was the shock."
" Our empirical analysis lends considerable support to the Minsky-Kindleberger view of financial crises as "credit booms gone wrong"
"The credit system seems all too capable of creating its very own shocks, judged by how successful past credit growth performs as a predictor of financial crises."
" Past credit growth spectacularly improves the forecasting power of an early warning banking crisis model in our data. "
"Using long-run historical data, the growth rate of lending emerges as the single best predictor of future financial instability, a result which is robust to the inclusion of various other nominal and real variables. "
"Moreover, credit outperforms other possible measures such as broad money by some margin. "
" Long-run historical evidence therefore suggests that credit has an important role to play in central bank policy."
" After their recent misjudgements, central banks should clearly pay attention
to credit aggregates and not confine themselves simply to following targeting rules
based on output and inflation. "
