Borio and White, in particular, building upon Kindleberger’s classic historical analysis of bubbles and panics,3 had suggested that periods of inflation and output growth stability may sow the seeds of future instability, by engendering in the general public the erroneous notion that a new and much more stable era had been entered, in which the old rules did not apply any longer. In this respect, it is interesting to notice that the Great Moderation period had been characterized not only by large decreases in macroeconomic volatility for both inflation and output growth, but also by a dramatic compression of risk premia across several asset classes, which is compatible with the notion that economic agents were indeed regarding the volatility decreases as part of a “new norm” characterized by permanently more stable macroeconomic dynamics. With the benefit of hindsight – and of the decisive “test” of the respective validity of the different viewpoints provided by the crisis – it is today easy to appreciate the soundness of Borio and White’s position. The Great Moderation years had been characterized, compared with the previous portion of the post-WWII era, by a significantly more frequent occurrence of asset price bubbles and subsequent crashes. A longer-term perspective focusing on the last two centuries even shows that the occurrence of asset price booms and busts under conditions of price stability, far from being a “fluke” of the Great Moderation era, have in fact been historically quite common.

The need to broaden the spectrum of views available to policymakers  An interesting example of this necessity can be found in a report, recently released by the International Monetary Fund,11 assessing its performance during the years before 2007, and  11  See International Monetary Fund (2011). BIS central bankers’ speeches  7  in particular its failure to sound alarm bells regarding the impending economic disaster. Among the problems the report identifies, key issues which are discussed are: “a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, [and] lack of incentives to […] raise contrarian views”. The report also makes clear that some contrarian views raising doubts about the prevailing consensus were indeed present within the IMF – most notably, as I previously discussed, they had been presented by the Fund’s Chief Economist, Raghuram Rajan, in an address at Jackson Hole in 2005 – but that in most cases, they had simply not been included in the final versions of the Fund’s official documents produced for policymakers, and therefore failed to make any dent in the mainstream position, which remained resolutely optimistic. Although the risks associated with issues such as “groupthink” and “intellectual capture” are always present, they can be countered by broadening the spectrum of views available to policymakers. The latter should always search for logical inconsistencies, problematic assumptions, and inconsistencies with historical evidence pertaining to analogous situations, and present alternative scenarios based on different assumptions and competing analytical frameworks.