As President Franklin D. Roosevelt famously once observed: “The only thing we have to fear is fear itself”. At the tail of end of an historic bull market, with an ongoing trade war, bond bubble and worrying signs of impending recession, policymakers should take note of, given the findings of research by Philippe Bacchetta and Eric van Wincoop into the causes of the Great Recession. As the two academics reveal, it can be a comparatively short step from boom to bust, once negative sentiment begins to drive a self-fulfilling chain of events that can quickly evolve into a panic driven, full-blown global economic crisis. A panic that would make the difference between an economic slowdown and another deep global recession.
In the aftermath of the 2008 financial crisis it became clear that regulators had allowed many financial services firms to become “too big to fail”. Yet this system-critical firm problem is not confined to financial services. In their paper “Can electricity companies be too big to fail?” Ann van Ackere, Erik R. Larsen and Sebastian Osorio explain how a similar challenge faces the electricity sector, and offer some suggestions to help regulators prevent the lights from going out.