Thank you for the opportunity to speak to you today. I am here to discuss one of the most important resources that policymakers have: the lessons of history. In discharging my responsibilities at the Federal Reserve, I have been thinking a lot about history. Its study provides the opportunity to step out of the particular circumstances of today to inform our understanding of the core issues at the heart of financial regulation. While we must be attentive to new and even unprecedented challenges, experience shows that understanding the lessons of history gives policymakers a great advantage. Many of the decisions we face today have, in some form, been confronted by previous generations of policymakers.
In these remarks, I want to discuss a particular pattern in the history of the financial system, which is the relationship between regulatory weakening and the economic and financial cycle of booms and busts. My intent is not to re-hash well-examined facts or to go over past historical episodes chapter and verse. Rather, I aim to offer a perspective on this historical throughline that focuses on the regulatory cycle.
It’s widely accepted that the economy and financial system experience cyclical booms and busts. Booms have historically been characterized by a multitude of good things. These can include fast economic growth, workers who had been sidelined entering the workforce and improving their lives, and financial innovations that often make credit or investments more readily available. At the same time, some of the characteristics of a boom economy, such as rapid increases in credit and in financial market activity, as well as greater risk-taking and leverage, can sow the seeds of busts. In busts, economic activity and lending contract and asset prices decline. This can lead to rapid deleveraging and dislocation throughout the financial system, which worsen the downturn, causing job losses and business closures, homes lost and lives upended.
