Can humanity completely prevent financial crises?
This is a great question, and a topic that has been debated in economics for hundreds of years.
In short: It's virtually impossible.
Imagine the financial system as a complex ecosystem, or a weather system. We can predict the weather and prepare for storms, but can we completely prevent storms from happening? No. The same applies to financial crises.
Why is it almost impossible to completely avoid financial crises? There are several main reasons:
1. Human Greed and Fear
This is the most crucial point. When the economy is good, people become optimistic, even greedy. Investors feel "this time is different" and start chasing high-risk, high-return assets, while banks are willing to extend more loans. This process is like blowing a bubble, growing larger and larger. During this time, risks quietly accumulate.
Once market sentiment shifts, for example, a major company collapses, or housing prices start to fall, fear quickly replaces greed. Everyone rushes for the exit as if hearing "fire!", scrambling to sell assets and withdraw loans. This panic-driven stampede can instantly trigger a crisis. As long as human nature remains unchanged, this "boom-bust" cycle will be difficult to break.
2. Systemic Complexity and "Invisible Risks"
Today's global financial system is an extremely vast and complex network, connecting banks, funds, insurance companies, ordinary investors... everyone is linked by an invisible web. A loan from Bank A might be packaged into a financial product and sold to Fund B, which then uses it as collateral to borrow from Bank C.
This interconnectedness means that a small problem in one corner can quickly spread throughout the entire system like a domino effect, triggering a full-blown avalanche. Because the system is too complex, no one can fully see where all the risks are hidden. By the time we discover them, it's often too late.
3. The "Cat-and-Mouse Game": Innovation vs. Regulation
The financial sector is never short of "smart people." In pursuit of higher profits, they constantly create new financial instruments and strategies (like CDOs and CDSs during the 2008 crisis). When these new things emerge, regulatory rules often lag behind.
This creates an eternal "cat-and-mouse game": financial institutions continuously seek loopholes in regulations to innovate and arbitrage, while regulators desperately try to catch up and patch things up. By the time regulators close one loophole, new "innovations" emerge. As long as the temptation of profit exists, this game will not stop.
4. The Natural Law of Economic Cycles
The economy itself has its own cycles, just like the four seasons. There are periods of expansion, and inevitably, periods of contraction. Trying to forcibly "smooth out" all fluctuations with policies and keep the economy in perpetual high growth is not only unrealistic but can also accumulate greater risks, leading to more severe recessions. Moderate adjustments and clear-outs are sometimes necessary for the long-term health of the economy.
While complete avoidance is impossible, what can we do?
Since it cannot be eradicated, our goal becomes: to make financial crises occur less frequently, cause less damage, and allow for quicker recovery after they happen.
Just like with earthquakes, we cannot stop tectonic plate movements, but we can:
- Build stronger houses (strengthen regulation): Require banks to hold more reserves (capital adequacy ratio) and conduct regular "stress tests" to see if they can withstand market shocks.
- Establish early warning systems (macroprudential management): Monitor systemic risks, such as real estate bubbles and debt levels, issue warnings in advance, and take measures.
- Prepare firefighters and first-aid kits (crisis response mechanisms): Once a crisis occurs, central banks and governments must act swiftly, injecting funds (liquidity) into the market like "firefighters" to prevent panic from spreading; and rescuing critical financial institutions like "first-aid kits" to prevent the entire system from collapsing.
In summary, hoping for humanity to completely bid farewell to financial crises is like hoping we can create a world without viruses, accidents, and always sunny weather—it's a beautiful wish, but unrealistic. What we can do is continuously learn and reflect, striving to make our ship sailing in the financial ocean more robust and our crew more experienced, thereby better withstanding the inevitable storms.