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The Big Financial Experiment

  • Why it matters

    Why it matters

    For many, the new powers of authorities to curb speculation by restricting loans could finally be the answer to preventing future financial crises. But many of these powers are untested, and could end up hurting ordinary citizens.

  • Facts

    Facts

    • Since the 2008 financial crisis, most industrial nations have created a supervisory board charged with identifying and stopping potential bubbles from developing in the financial system.
    • The financial crisis changed the way many regulators think. The market is no longer trusted with knowing whether the price of a house or another asset is appropriate.
    • The Financial Stability Board, once a little-known group of financial experts, has been charged with coordinating the global effort to curb excessive speculation.
  • Audio

    Audio

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Wolfgang Schäuble likes to needle his colleagues by saying he has little real power: the German finance minister argues his voice is rarely heard in a cabinet of ministers with big spending plans.  And yet, Mr. Schäuble and many of his counterparts around the world are actually far more powerful than any of their predecessors.

The Finance Ministry recently hosted a low-key meeting of big-time financial experts in Berlin. The group, a kind of shadow economic government run by Mr. Schäuble, acts as a national supervisory board. It is charged with preventing the next financial crisis and has been given sweeping powers to restrict lending to consumers and companies – effectively slowing down the economy if needed.

The German experts are part of a growing international network designed to make the global economy more resilient. In fact, nearly all industrial nations have created similar boards to guard against financial excesses. The Financial Stability Board is the international organization overseeing these national groups.

For Mr. Schäuble’s group, its time in the spotlight may have arrived: record stock market closings and rising housing prices in many rich countries mean many governments are considering using their newfound powers for the first time. The Bank of England was among the first to act when earlier this month it restricted the amount of risky loans banks can make to British homeowners.

And so the world may soon bear witness to a brand new economic experiment. If all goes well, regulators could deal a decisive blow to over-speculation in the market place. But just like any other new experiment, there is a danger of it spiraling out of control.

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