Forecasting, warning and preventive policy: The case of finance

Abstract

Crisis or problem prevention and mitigation are central to many disciplines, including defence, homeland security, nuclear energy, chemical engineering and the handling of natural disasters such as earthquakes and floods. As is evident from the contributions to this book, a rich literature has developed a framework for analysing the factors that determine whether crises can be prevented and/or their effects mitigated. The framework used in this book (Chapter 1) highlights four specific challenges to successful crisis prevention/mitigation: risk recognition, warning about risks, prioritisation of risks vis-à-vis other demands, and preventive/mitigating action. This chapter attempts to apply this framework to finance and to the problems that we are facing in formulating a new financial system - one that will be more resistant to crises, so that we will not face another economic calamity on the scale of the downturn that started in 2007.