Who Should Safeguard Financial Stability?

NEW HAVEN – Central bankers around the world failed to see the current financial crisis coming before its beginnings in 2007. Martin Čihák of the International Monetary Fund reported in July 2007 that, of 47 central banks found to publish financial stability reports (FSRs), “virtually all” gave a “positive overall assessment of their domestic financial system” in their most recent reports.

And yet, although these central banks failed us before the crisis, they should still play the lead role in preventing the next crisis. That is the conclusion, perhaps counterintuitive, that the Squam Lake Group [http://squamlakegroup.org/], a think tank of 15 academic financial economists to which I belong, reached in our recently published report,Fixing the Financial System.