delisle worrell : making the financial system more secure address by dr delisle worrell, governor of the central bank of barbados, at a joint luncheon meeting of the barbados international business association ( biba ) and domestic bankers, hastings, 2 february 2010. * * * the dramatic collapse of lehman brothers in september 2008 may well have completed the process of rethinking the management of financial systems, and of reinventing central banks. it used to be that central banks were mainly concerned with monetary policy, and only peripherally with matters of financial regulation. indeed, there was sentiment in favour of removing responsibility for financial regulation from the ambit of central banking altogether, and some argued that for the monetary policy maker to be financial regulator as well, was a conflict of interest. that view of the world began to come unstuck in the 1990s, with the onset of a series of international financial crises with far reaching implications, and the mandate for monitoring the health of the financial system was placed squarely on the shoulders of the central bank. financial stability is now firmly on the agenda of central banks everywhere, and the bank ’ s mandate of necessity encompasses all financial institutions which have the potential to destabilise the system as a whole, whether or not they are actually under the central bank ’ s legal purview. in this address i will explain what we mean by financial stability, why financial stability is important, and how we seek to attain financial stability. the quest for financial stability interest in financial stability was rekindled by a series of financial ( and exchange rate ) crises which began with the mexican crisis of 1994, followed by crises in russia, brazil, the far east, and turkey, to name the best known examples. in response, the scope of financial sector oversight, which had previously focused on the prudential health of individual institutions, was broadened to encompass the financial system as a whole. the aim was to avert the possibility of new financial crises emerging, to develop early warnings of possible financial difficulties, and to minimise the cost and ramifications of such financial failures as did occur, so as to prevent them snowballing in ways that would lead to widespread failure. that aim was reflected in the intensification of research on financial risk management, the widespread adoption of indicators of financial soundness, the universal obsession with the much misunderstood stress tests, the publication of financial stability reports, the revision of international guidelines for financial oversight and the institution

at the accra beach, the caribbean centre for money and finance, assisted by the caribbean technical assistance centre, convened a conference on a caribbean regional project on price formation, a project which is led by professor roland craigwell of the uwi, who is an associate of the ccmf. the novel feature of the project is that it measures observed behaviour of prices of specific items over time, reporting on how frequently prices change, whether they go down as well as up, and what are the magnitudes of change for different items. this contrasts with the orthodox approach to price, which seeks to determine a demand and a supply, and to find a point of equilibrium. we need to take eclectic approaches to empirical work, acknowledging that economic theory can lead us in the wrong direction, and economic measurement and testing is at best a makeshift process. in our universities we teach aspiring economists to ask whether research has theoretical foundations ; rather, they should be asking themselves whether the research makes sense, and follows sound principles of logic. the reality is that economics knows of no overarching theories that stand up to all tests, and we must therefore admit to a variety of small theories, to be understood, not as the laws of the medes and persians, but as clues to aid us in the search for deeper insight into the way the economy works. we must also admit that our statistics and our tests are very fragile. we make statements like “ the economy grew by 5 percent ” with the same assurance as the statement that “ delisle worrell is 5 ’ 5 ” tall ”. those are not comparable statements of fact. my height can be established with certainty ; the gdp of the country is an educated, informed guesstimate. the machinery simply does not exist to survey every company and individual who produce a good or service for sale, compute the total value of all those goods and services, deduct the value of all the materials and goods they bought, the electricity and input services they used, and adjust all those calculations for the changes in prices of all inputs and outputs. so we have to approximate. our econometric tests are laden with assumptions that we often seem to forget. the most basic is that the future will be like the past, an assumption which we know to be more and more unwarranted, the further out we go. to give just one illustration : it is not reasonable to make inferences about the international economic crisis of 2008 from research on the stock market crash