The Wisdom of Crisis Prevention

ANKARA – Regardless of how differently governments may formulate policy, ensuring financial stability is their common responsibility. This calls for real and effective policy coordination and an overarching macro-prudential governance framework at both the domestic and international levels.

The simple truth is that the cost of preventing financial crises is much lower than the costs imposed by them after they erupt. After all, financial crises are directly linked to significant output declines and unemployment spikes; and, equally important, they often severely damage social cohesion.

Five years from its outbreak, the fallout from the financial crisis and recession triggered by the collapse of the US investment bank Lehman Brothers continues. In many advanced economies, real GDP remains lower than its pre-crisis level. Unemployment rates and budget deficits are higher, and public debt/GDP ratios are at record levels.

Macro-prudential policies are not a substitute for sound macroeconomic policies; nonetheless, they are essential to preventing large asset bubbles and distortions in financial markets, and thus to reducing the risk of adverse shocks to both markets and the real economy.