Book Review: 'The macroprudential quandary: Review of ‘Balancing the Banks: Global Lessons from the Financial Crisis’'

Abstract:

Until three years ago, we were living in the ‘Great Moderation’. Macroeconomic outcomes were unusually good. It is true that the environment was helpful – with a surge of cheap imports from Asia. But macroeconomic policy – built around inflation‐targeting regimes – was apparently also good. And microeconomic policy seemed good too. In particular, light‐touch regulation of the financial sector seemed just what was needed. Then things fell apart.

There are now a number of valuable narrative accounts of the global financial crisis, and some piecemeal reforms are underway.¹ But what we still need is a clear theoretical analysis of why the crisis happened and a clear theoretical analysis of how best to reform financial regulation. This short book, by three of Europe’s outstanding researchers on the microeconomics of finance, takes a valuable step towards these two objectives.² But what it does not do – and the authors would agree with this – is explain why there was such a huge macroeconomic magnification of the crisis. Nor does it explain how macroprudential regulation should be reformed to prevent such magnification happening again.