Just as there are recurring themes in literature—and flies in the wake of a garbage truck–there a few things that we can reliably count on in the wake of a financial crisis.
In the immediate aftermath comes damage control. The central bank intervenes. The legislature and executive agree on emergency measures. Bankers keep their heads down.
Then come more substantial structural reforms (e.g., Dodd-Frank). By the times these arrive, the political process is already moving more slowly and cautiously: as those who might be affected by the reforms gather their wits and mobilize their lobbyists, the forces for reform are blunted. These are long, slow, costly battles. The results are usually less satisfying than hoped for.
Then comes the reports of the various study groups and inquiries. These can have profound effects. Following the crisis of 1907, the United States established the National Monetary Commission, which by 1911 had produced one of the greatest treasure troves of financial intelligence that has ever been assembled. The Commission’s work eventually led to the establishment of the Federal Reserve, the third and finally successful attempt (in less than 120 years) to establish a central bank.
The US Financial Crisis Inquiry Commission is slated to release its report on Thursday (it is already clear that the committee’s recommendations will be split along party lines). The UK Independent Commission on Banking is slated to issue a report by this spring. Comments by its chairman, Sir John Vickers, about reining in British bankers has sent chills down the spines of a number of some of Britain’s largest banks.
One of the few benefits of a financial crisis is an ability to learn from our mistakes. Let’s hope that these reports will help us do just that.