A sombre concluding thought in ‘Monetary Policy Strategy: Lessons from the Crisis,’ a recent paper by Frederic S. Mishkin, is that we have just been through a once-in-hundred-year credit tsunami that has had a devastating impact on the economy that will last for years to come. The good news, however, is that macro/monetary economists and central bankers do not have to go back to the drawing board and throw out all that they have learned over the last forty years, he adds. “Much of the science of monetary policy remains intact. The case for the basic monetary policy strategy, which for want of a better name, I have called flexible inflation targeting, is still as strong as ever, and in some ways, more so.”

Not long ago, Mishkin wrote ‘The Next Great Globalization: How disadvantaged nations can harness their financial systems to get rich’ (www.landmarkonthenet.com), which wrapped up by fretting that not every emerging market country has the political will of Chile, Hong Kong, Singapore, and Taiwan to adopt the reforms needed to make financial globalisation work. Stating that globalisation will work when a country’s political and business leadership is committed to improving the lot of its citizens, he notes that these countries prove that the next great globalisation should be financial.

The author reminds that an economy’s ability to allocate capital to its most productive uses enables it to reach its full potential in terms of growth, high income per person, and all the benefits that come with achieving these goals. He underlines that developing such ability takes dedication, hard work, commitment, and time; and that it also takes the development of institutions that promote strong property rights and a well-functioning financial system that moves funds to support productive investments. “Institutional development is a complex process, and the ‘one size fits all’ approach of taking institutions from advanced countries and plopping them down in poor countries has not worked. Institutional frameworks must be home-grown.”

Prescription for crisis prevention

A chapter on ‘Preventing financial crises’ highlights the need for giving adequate resources to prudential regulators and supervisors. Mishkin laments that in close to 40 per cent of developing countries, supervisors can be held personally liable for their actions in civil lawsuits, and that their salaries are generally low relative to those paid in the private sector. “In India, for example, bank supervisors in the late 1990s typically had an annual salary of $3,000 (plus housing benefits), while a comparable assistant vice president position in a private sector bank was paying $75,000.”

The author warns that without sufficient resources and incentives, supervisors will not adequately monitor the activities of banks and their managers, the author warns. He reminisces how proper monitoring of banking institutions has been absent in both emerging market countries and industrialised countries. “For example, the US Congress’ resistance to providing the savings and loan supervisory agencies with the resources to hire an adequate number of bank examiners was a key factor in worsening the savings and loan crisis in the 1980s.” He is also of the view that allowing supervisors to be held personally liable in legal suits for carrying out their responsibilities makes it less likely that they will take the appropriate actions, for fear of such suits.

Recommended study for finance professionals, as a way of future-proofing themselves.

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