Regulators must be aware of new narratives in market psychology, Robert Shiller says
by Robert J. Shiller
NEW HAVEN, Conn. (Project Syndicate) — What do people mean when they criticize generals for “fighting the last war”? It’s not that generals ever think they will face the same weapon systems and the same battlefields. They certainly know better. The error, to the extent that the generals make it, must operate at a more subtle level.
Generals are sometimes slow to get around to developing plans and ordnance for those new weapon systems and battlefields. And just as important, they sometimes assume that the public psychology, and the narratives that influence the morale that is so important in achieving victory, is the same as in the last war.
That is also true for regulators whose job is to prevent financial crises. For the same reasons, they may be slow to change in response to new situations.