As I have discussed here, this is a multifaceted issue that must consider crisis predictability, management, and the role of research in providing rigorous frameworks – albeit incomplete ones – with which to analyze reality. Nonetheless, that macroeconomic theory has failed is an overstatement. In particular, the comparatively better performance of emerging economies – with the exception of a few cases such as Eastern Europe that remind us of our mistakes of the past – demonstrate that economic research has taught us something. In particular, the majority of macroeconomic policies have sought not to replicate past mistakes. Now it is necessary to analyze more carefully the role of financial markets, their virtues and, of utmost importance, their vulnerabilities. This crisis is an admonishment to professional arrogance. We must recognize that the real world is much more complex than what our models can explain. This is why so-called  6  BIS Review 112/2009  professional orthodoxy is discredited. However, we must also avoid the arrogance that comes from ignorance, which leads to abandoning all we have learned about the fundamentals of good macroeconomic policies. References Berg, A., E. Borensztein and C. Pattillo (2004), “Assessing Early Warning Systems,” IMF Working Paper, 04/52. Bernanke, B. (1983), “Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression,” American Economic Review 73(3): 257-76. Bernanke, B. and H. James (1991), “The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison,” in G. Hubbard (ed. ), Financial Markets and Financial Crisis, Chicago: Chicago University Press.
4  BIS Review 112/2009  the existence of cars. However, it seems more reasonable to build safer cars, buckle up and drive prudently. Crises will continue to happen, but the proper way to act is to strengthen the financial system and macroeconomic policies, in order to minimize their consequences and probability of occurrence. We must not remain in the notion that a crisis cannot be prevented and thus there is nothing we can do about it. Going back to the car analogy, the fact that accidents will always happen does not mean that we must allow driving at any speed and with no regulation. Quite the contrary, we know that crises are especially severe when they affect the financial system, so it is reasonable to improve regulatory mechanisms, particularly to allow financial innovation while keeping vulnerability under control. Meanwhile, it is necessary to continue devoting efforts to the detection of early alerts, although, as I have already pointed out, unambiguous indicators are impossible to find. But there are symptoms of fragility, very common in emerging economies. High and persistent current-account deficits, misaligned exchange rates, currency mismatches in the financial and corporate sectors, excessive increases in the prices of assets and credit, all signal a potential problem, although they do not result necessarily in a crisis. 8 Therefore, a look at the indicators is not enough, it is important to put them together to detect fragilities.