It would be naïve to think we can ever entirely prevent crises - and indeed it may be undesirable to attempt to do so. But it is realistic to think that the incidence and severity of crisis can be mitigated through appropriate public policy actions. This is the grandly-titled “new international financial architecture” about which you have no doubt heard. I want to discuss some of the efforts of the official sector in redesigning the international architecture achievements to date and, importantly, challenges for the future. While a lot has been achieved, much remains to be done. I will also suggest where I think the official community’s future efforts might best be directed. 5  BIS Review 70/2000  Dealing with financial crisis The first priority of the official community must of course be crisis prevention. And on this front good progress has been made. For example, we now have a substantial array of codes and standards of best practice covering public policy issues: transparency in macroeconomic policies; core principles for the supervision of banks, insurance companies and securities firms (including the changes to the Basel Accord which I have just discussed); principles for corporate governance, insolvency and market integrity; and standards for data, auditing and accounting. Implementation of these codes of best practice is now the key - ensuring that crisis-prevention principles are put firmly into practice, in both developed and emerging economies.
There is no other way to forecast future developments intelligently than to examine the indicators from the recent past, apply to them the metrics that the copious experience from Iceland and abroad has taught us to use, and to use both indicators and metrics as a guideline in projecting future developments. If we didn’t use this method, there would only be one left: to pour tea into a cup, turn it upside down, and read the tea leaves when the saucer is dry. The Central Bank has no comment to make on those who wish to pursue that course, but it isn’t likely to be terribly successful. When the Central Bank announced its interest rate decision, it stated that several factors that have made inflation harder to control could change over time. Sooner or later, higher mortgage interest rates will affect the real estate market. Global financial market conditions have changed for the worse. Those changes are already being felt, and sooner or later they will be felt in Iceland as well. In its forecasting, the Bank takes these factors into account, and it does not rule out the possibility that their actual impact will be greater than projected. Many people hoped that the unrest in the financial markets, which stems largely from the subprime mortgage market in the US, would blow over rather quickly. Some even seemed to believe that a modest drop in US interest rates would be sufficient to coax everything back into place once again.