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Responding to Financial Crises

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  • Frankel, Jeffrey

    (Harvard U)

Abstract

They say 'there are no atheists in foxholes.' Perhaps, then, there are also no libertarians in crises. Even those in favor of sharply reducing the role of the government usually agree that, for example, there is a valid Lender of Last Resort role for the central bank in the event of banking panics or disruptions as occurred on September 11, 2001. But crises should not become an excuse for public policy that is hasty or ill-informed, or that serves primarily the interests of the policymakers themselves or of special interests. The response must be appropriate and careful. It must be informed by the longer term perspective offered in the lessons of historical precedent, particularly regarding the fallibility of well-intentioned government intervention, and by an awareness of the dangers identified in the theory of moral hazard. This paper details some of the lessons from several past crises of varying nature: inflation crises, stock market crashes, bond market crashes, housing crashes, and various international crises, including the possibilities of a hard landing for the dollar, emerging market crises, oil shock, geopolitical crisis, and trade collapse. This paper draws heavily on US historical examples from the last four decades.

Suggested Citation

  • Frankel, Jeffrey, 2007. "Responding to Financial Crises," Working Paper Series rwp07-010, Harvard University, John F. Kennedy School of Government.
    • Handle: RePEc:ecl:harjfk:rwp07-010
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    File URL: https://research.hks.harvard.edu/publications/workingpapers/citation.aspx?PubId=4519&type=WPN
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    References listed on IDEAS

    as
    1. Richard H. Clarida, 2007. "G7 Current Account Imbalances: Sustainability and Adjustment," NBER Books, National Bureau of Economic Research, Inc, number clar06-2.
    2. Menzie Chinn & Jeffrey A. Frankel, 2007. "Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 283-338, National Bureau of Economic Research, Inc.
    3. Frankel, Jeffrey, 2006. "Could the twin deficits jeopardize US hegemony?," Journal of Policy Modeling, Elsevier, vol. 28(6), pages 653-663, September.
    4. Francis E. Warnock & Veronica C. Warnock, 2005. "International Capital Flows and U.S. Interest Rates," The Institute for International Integration Studies Discussion Paper Series iiisdp103, IIIS.
    5. Jeffrey Frankel, 2003. "What an Economic Adviser Can Do When He Disagrees with the President," Challenge, Taylor & Francis Journals, vol. 46(3), pages 29-52.
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