Jacek Rostowski, the Minister of Finance of Poland, delivered a key note speech at The Return of History: From Consensus to Crisis CASE International Conference.  His speech raised a remarkable interest from all participants. Turning down the view that the recent financial crisis is a crisis of capitalism, Rostowski argues that what happened is a crisis of “the deep Keynesian project,” implying that the aim of economic policy is minimizing economic fluctuations on the down. This policy succeeded for almost 20 years and it led to this massive crisis, because, to quote the Minister:

“what drives the market is the balance between fear and greed. If you successfully remove the fear you have no right to complain when the greed takes off".

In this context, Rostowki advocates that smaller crises should be allowed to happen to discipline the marketplace and to avoid a bigger crisis in 10-15 years.

Rostowski outlined several other caveats for the future of the international system. Firstly, he is positive about the need to reform the European system of financial regulation and supervision. Currently he cites the system’s flaw as the disproportions between power and responsibility. Rostowski warns however, that a reformed system will not be more sustainable unless moral hazard is taken away and financial institutions are prevented from growing as big as they are.

Continuing his diagnosis of the crisis and making prospects for the future, Rostowski states that the financial bubble in the USA might be mirrored by the real-asset bubble in China.  There is a concern that if the Chinese monetary policy, which facilitated these bubbles, goes on long enough, it might lead to significant dollar depreciation and default of US treasury notes.

Finally, Rostowski questions the necessity of large fiscal stimulus as a response to the crisis.  Although he agrees that bank recapitalization could not have been avoided. The resulting increased debt-to-GDP ratio will strain growth in some countries for over 1 or 2 decades. The Minister points to future fiscalization of bank assets and increasing the retirement age as viable options to curb the effects of rising debt-to-GDP ratios.

Rostowski concludes by applauding the political system for not reverting to measures of protectionism in the time of crisis.  He believes that the protectionism derived from the Great Depression, caused the great damage to the world economy.

[video presentation]