Hard lessons everyone must learn from the global financial crisis

On the one hand, the US and Canada appear to be insisting that laissez-faire economics is still the best system for delivering growth, as exemplified by outgoing US president George W Bush's statement given ahead of the Group of 20 (G20) summit.

In his speech at the Manhattan Institute in New York, Bush said policymakers should resist the urge to meddle too much in markets as they seek to reverse the financial and economic turmoil now engulfing the world.

"History has shown that the greater threat to economic prosperity is not too little government involvement in the market, but too much," he said.

On the other hand, policymakers in continental Europe now generally favour more government regulation of the markets than their North American counterparts.

Little, or even the absence of, regulation on derivatives and other highly-leveraged financial products have been blamed for contributing to the current financial crisis.

Jong-Wha Lee, head of the Office of Regional Economic Integration, Asian Development Bank, said in a recent speech in Bangkok that financial innovation and stability must be balanced, as must market freedom and government regulation.

In his paper, titled "The Global Financial Crisis: Implications for Asia," Lee said Asian economies have to rein¬force regional cooperation while devising countercyclical polities.

In addition, other medium and long-term challenges include strengthening market infrastructure and broadening domestic financial systems.

As for the more immediate measures, Lee said the region needs to strengthen crisis management frame¬works and enhance liquidity, while strengthening risk management and supervision and boosting regional coordination on emergency efforts.

In hindsight, we could learn several lessons from the current global crisis, triggered by the US financial meltdown, as follows:

First, risk dispersion is not a reduction of risks, as exemplified by the failure of certain financial products in the US meltdown, such as the so-called credit default swaps used in managing the risks of subprime mortgages.

Second, leveraging is not a creation of credit, but it appears to have increased the financial system's overall risks.

Third, market discipline is not a substitute for government regulation, so we will need to strike a new balance in trading off market stability and growth while reducing dependence on the market's ability to make self-correction.

Last, but not least, we need to adopt countercyclical regulations, or, in other words, in good times we also need to prepare for the bad.