Sunday, September 30, 2007

Finding the Right Precedent

Harold James, the financial historian, looks back for historical parallels to the current financial turmoil. His bottom line:

If today’s credit crunch has historical parallels, they are closer to nineteenth-century “normal crises” like 1837, 1847, or 1857. In those panics, financial innovation caused uncertainty and nervousness, but also induced an important and beneficial learning process. The financial institutions that survived the crises went on to play a crucial role in pushing further development, and they had enhanced reputations because they withstood a crisis.

Sometimes monetary and fiscal authorities have an obligation to ignore the wilder historical parallels and look at a broader picture. Sometimes, too, the best response to a crisis is this: don’t just do something; stand there and do nothing.

James, incidentally, once coauthored work on financial crises with some guy named Ben Bernanke.