Wed Apr 20th, 2011 at 04:35:38 AM EST
(That probably will not be learned)
Lesson 1: The state of readiness of our financial regulators
at the start of the crisis was is contemptible.
Part of this is, of course, due to political obstructionism, but I think a large part of it is simply that financial regulators lack routine when it comes to placing large financial institutions in receivership. I think we'd get pretty far if we could get the financial regulator to hold regular (say, monthly) in-house drills of how to resolve banks, plus yearly "war games" where they play out some disaster scenario (attack on the currency, collapse in the real estate market, etc.). Drills serve both to familiarise people with the unfamiliar and to provide regulators with a weight of authority to counter political obstruction.
Lesson 2: Federal currency, state-level fiscal policy, persistent interstate trade surplus: Pick any two.
Lesson 3: Low inflation, heterogenous currency union, state-level fiscal policy: Pick any two.
front-paged by afew
Lesson 4: A country can only guarantee its currency against appreciation, not depreciation.
Corollary: The primary responsibility for maintaining a currency union rests with the strong currencies.
This one really should have been learned already in 1993.
Lesson 5: Gutting public spending during a recession is how you turn the recession into a depression.
The fact that we still have to remind people of this three quarters of a century after the Great Depression decisively proved it is somewhat depressing.
Lesson 6: The discount window enables a central bank to keep certain lines of credit alive, even as the rest of the financial system burns.
This has a number of interesting applications. For one thing, if the central bank provides liquidity through the discount window, it will get a near-realtime picture of the balance sheets of the private banks. For another, by jacking up reserve requirements, the central bank can discriminate the cost of funding between different sorts of lending. And third, by refusing to rediscount purely speculative loans, the central bank can ensure that it will not be the sucker during a Soros attack (and potentially prevent it altogether if no other sufficiently big sucker can be found).