Economic cure before prevention

Economic policies should focus on ensuring recovery from the current recession rather than preventing the next crisis according to Miguel Ángel Fernández Ordóñez, former Governor of the Bank of Spain.

Speaking at the Bearing the Losses from bank and Sovereign Default in the Eurozone conference held at the EUI on 24 April, Ordóñez said even at the height of the crisis the priority appeared to be prevention of subsequent problems saying in some meetings he attended 80-100 per cent of the time was allotted to prevention discussions.

Policies surrounding the fall of Lehman Brother focused on issues of long term moral hazard and economic discipline dismantling the ‘too big to fail’ myth. The restructuring of Greek debt and the Cypriot haircut, according to Ordóñez, where not in the best interests of short term recovery.

“Everyone now agrees spending cuts and tax increases were wrong,” said Ordóñez, adding that the policies damaged short term prosperity.

The potential trade-offs between long term prevention and short term recovery should always be at the forefront of policy makers minds “regardless of the policies primary intentions,” said Ordóñez.

“While the crisis is not over it must take priority over the prevention of the next crisis.”

In analysing the decision making during the crisis, the speed required and the intense public opinion these decisions were subjected to must be taken into account.

New economic paradigms take into account the irrational behaviours of consumers and investors, Ordóñez suggested a similar approach should be taken when it comes to studying the financial crisis.

“I’m not naïve, authorities will continue to act irrationally.”