ECB President Trichet speaks on financial crises

    ECB president Jean-Claude Trichet. Photo by Blake Sobczak / North by Northwestern

    Northwestern welcomed Jean-Claude Trichet, president of the European Central Bank, as part of Kellogg’s Distinguished Lecture Series on Tuesday for a lecture on ‘What central banks can do in a crisis.’ The 2007 Financial Times Person of the Year spoke as part of the annual Susan Bies Lecture on Economics and Public Policy to a full Owen L. Coon Auditorium, which seats about 600 people.

    According to Trichet, preventing financial crises has become “a race between education and catastrophe.” Policy makers have to learn from the scarring lessons that past financial crises have taught and solve financial catastrophes promptly.

    Dr. Lawrence Christiano, Kellogg Professor of Finance, introduced Trichet as one of the few people responsible for coming up with creative and ingenious solutions in a near-global financial crisis.

    Trichet began his address by reassuring the audience that “the global economy is now recovering — albeit in a gradual manner — from the deepest recession experienced since the end of the Second World War.”

    Reminding the audience of the uniqueness of each financial meltdown in history, he proceeded to pose the question, “Should we thus view financial crises as unavoidable? Are our efforts to prevent them futile? Or can we hope to reduce their frequency, severity and impact on the broader economy?”

    Trichet first pointed out the commonalities that financial crises share across different episodes. Specifically, he pointed out that excess credit growth and lax monetary regulations preceded the S&L crisis, the dot-com bubble and the sub-prime mortgage market crash.

    Given these commonalities, Trichet suggested that it is possible to develop warning signals of latent financial crises, and policy makers can make swift and appropriate responses to avoid such crises.

    “Being able to identify financial tensions would allow appropriate policy actions to be taken in a timely manner,” he said, citing the ratio of global credit to global GDP as a sign that a financial crisis was on the horizon a few years ago.

    However, Trichet employed a more cautious tone as he said, “These hopes should not give rise to complacency, still less to the belief that by tweaking our policy framework we can condemn financial crises to the past.”

    He warned about the specificities of each financial crisis, which give rise to its precarious nature. The unique features of a financial crisis are linked to the economic and social context.

    In his concluding remarks, Trichet claimed that crisis management requires innovation, flexibility and respect for well-established principles.


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