Undoubtedly we have had a great progress in the economic thought in the twentieth century, especially about in the technical methods employed in this discipline. However, there are many facts which challenge our experience and knowledge. These facts are related to several economic facts like the financial crises. Perhaps, the last financial crisis is an interesting lesson for us.
After this financial crisis we found many lessons to learn, especially about the complexity of macroeconomics with focus on some aspects such as the monetary side economics. Mainly, it is related to aspects which have an essential role in the generation of financial crises.
Although it seems a known history and this note is only a brief summary about this topic, we want to consider the actions of the banks in the whole economic reality as a result of the new great disruptions. Undoubtedly it is a difficult objective because firstly, we clearly do not know about the possible future economic reactions in a certain framework, but the economic knowledge often has more details to tell us about several facts in the economic framework. Furthermore, one of these aspects is very important for the future.
The role of the banks in several crises was determinant, because they created a great expansion of money through loans that contributed for the generation of more risk in the markets. In this framework, the behavior of agents always was inconsistent, especially between their wealth, and their future income. On the other hand, we have to recognize a deep deficit in the macroeconomic literature. The role of banks in the classical macroeconomic models, such as the IS-LM, had been irrelevant until the last financial crisis on September, 2008. This was an important economic difficulty for the economic analysis. Thus, we have two main facts to discuss about it.
Beginning to the first argument, as a stylized fact, the growth of the importance of the money market always has been important in the previous path of financial disruptions. Over the past several crises, banks and financial agents were the main channel to create deep expansions at the time of the booms. In this context, financial regulations were inadequate, at least. Plainly, while the supply of money was growing, the expectations of agents build a framework where there were biases related to misconceptions. The huge creation of money was the key factor, because the perceptions of agents supported the irrational boom. Debts had been growing very faster creating financial fragility on agents´ balance sheets.
Therefore, the misconception was the mistake of identifying the consistency of the cycle in many occasions. In effect, since the last several crises, there has been a great mistake from taking economic decisions by using short run information that it would have long run effect. So, the Kutnez´ s hypothesis is essential in this regard.
We have to realize that economic booms always are transitory, but surely it would affect the near future. Not only always be the uncertainty in world economy, but also there are many factors to consider about risk. Commonly, economic behavior used to think on taking excess risk but it should have thought on the sustainability of this behavior. The future is uncertain, but also is so risk to forget the consequences.
The other key fact is related to the macroeconomic literature. Currently, there are many papers which consider banks as an important part of the models. In fact, it was necessary to revert, at least in part, the traditional position of the main macroeconomic line of thought. Plainly, the absence of banks in the macroeconomic analysis in several papers has contributed to expand the unknown facts about financial crises. However, we must remember that the most important economists about the history of money discussed deeply about this topic. For instance, Bagehot, Mises, Menger and others, had contributed to show the advantages and disadvantages from the role of the banks; mainly about the role of the central banks.
From this second argument, there are some lessons related to banks and their acts, particularly in financial markets, and in general in the economic framework .From these respects, I have two main observations to consider.
First and foremost, the continuous growth of the new technologies related to information has been essential not only to increase our possibilities to improve our lifestyle, but also to generate dangerous situations, at least in the financial markets. In this framework, the exclusion of banks, as determinant players, from macroeconomic analysis and the great set of information have been determinant to build an unsafe economic environment. As a result, financial crises have been very hard to explain, because banks generate credit money which expands the passives of the economic agents. Until September, 2008; the risk of these passives were minimized by a process called securitization. Banks, companies, and households had though that they had all the information that they needed, but it was a problematic fact. The increase in the generation of information did not equal to the capacity of the whole agents and institutions to absorb it. Although, if we disregard our limitation related to the huge information, we have to recognize that there was a great generation of debt. From this respect, many financial sheets had begun to deteriorate, because the passives were riskiest, and the policy makers did not control it.
The information about those positions seemed correct. However, policy makers and the financial regulations could not control it, because there was a deeply asymmetry in the information that had built an enormous set of inconsistencies. Undoubtedly, those facts were the main aspect which contributed to the beginning of the crisis.
On the other hand, macroeconomic stability is an excellent purpose not only for important social aspects such as poverty, employment and development, but also to built economic confidence. Certainly, financial constraints are huge limitations for all of these purposes. Therefore, we have a difficult situation about the financial side economics, because banks and financial agents are essential for economic development, but it is almost opposite to the macroeconomic stability.Finally, we have two main facts which have helped us to improve our economic knowledge in a complex framework. However, the high speed of creation of information builds more risk. Thus, we have new macroeconomic challenges, and it demands new points of view about it which it is also a challenge.