Table of Contents

  • When I was appointed Secretary-General of the OECD in the summer of 2006, it was a pleasant, if unexciting, time to be an economist. The Great Moderation had already solved the problem of having continuous growth while keeping inflation under control. Deregulation had unleashed the creative energy of the financial system, ensuring that the economy would always have the funds it needed. And the science of economics had finally solved the problem of depressions, according to Nobel laureate Robert Lucas. A year later, that world fell apart. As I write these lines today, in the autumn of 2020, we are facing an even more serious situation, provoked by the Covid-19 virus. It is therefore important to identify significant parallels and differences with the great financial crisis (GFC), and to apply the policy lessons we have learned.

  • The OECD launched its New Approaches to Economic Challenges (NAEC) initiative in 2012 to draw lessons from the policy and analytical failures of the 2008 crisis and to develop “A Strategic OECD Policy Agenda for Inclusive and Sustainable Growth”. Since then, NAEC has catalysed a debate across the OECD and beyond on how to revise, update and improve policy thinking and action. The initiative promotes a systemic perspective on interconnected challenges with strategic partners, identifies the analytical and policy tools needed to understand them, and crafts the narratives best able to convey them to citizens and policymakers.

  • The OECD launched the New Approaches to Economic Challenges (NAEC) initiative in the wake of the 2008 financial crisis to understand the shortcomings of the analytical frameworks we had relied on and to establish the basis for a better way to produce policy advice. The obvious place to start was with economic models, but the problem was deeper than poor parameters and incomplete data. The models did not reflect the reality of the economy or of people’s lives in that economy; and they did not anticipate how the pain of the recession would lead to social and political crises.

  • The 2008 financial crisis revealed failings in the way economists treated the financial system in relation to the real economy and the way regulators dealt with it. The crisis taught us three lessons: finance is central to macroeconomic outcomes; multiple equilibria can be all-important under stressful conditions; and the political economy of policy matters.

  • This section reviews the theory and models of the financial system and examines what causes financial crises. It discusses what history teaches us about crises, and argues that the economic crisis that started in 2008 provoked a crisis in economic science. The section outlines three lessons and three trilemmas that characterise economics after the 2008 crisis. It describes the Adaptive Markets Hypothesis and considers how agent-based models and approaches adapted from physics could be used to better understand the financial system. Financial network analysis and narrative economics are suggested as ways to analyse and understand how actors at different scales make economic decisions and how they interact.

  • This section looks at the role of central banking in the crisis and how this relates to finance. It calls for socially responsible investment management on the part of fund managers and analyses the links between inequality and rent-seeking in the financial sector. It urges greater efforts to align the financial system with sustainable development. It argues that financial bubbles can be positive as well as dangerous. The section also considers the place of currency in relation to debt and sovereignty.

  • This section assesses what lessons have been learned from the financial crisis and what has changed in the financial system and its relation to the rest of the economy since 2008, and considers how the financial system stood up to the pressures of the Covid-19 pandemic. It retraces the road taken from the Bretton Woods agreements to the bailouts of the banking system in 2008. It examines the role of prudential regulation in managing the financial system, and debates whether evolution or revolution is needed for macro stabilisation. It discusses the equity aspects of regulatory reform. The section also analyses the role of monetary finance in dealing with debt. It examines new financial vulnerabilities and suggests ways policymakers might deal with them.