Recently, Governor Zhou Xiaochuan, a member of the Forum of 50 Chinese Economists, said during a Meeting of the Forum that it was necessary to prevent misreading of the history, sum up lessons and experience so as to have a clearer idea and better methodology regarding development of China s banking industry.
Zhou Xiaochuan stressed that reading the history of financial industry development correctly was not easy. There are two categories of history. The first one refers to history with continuous data. Tools such as econometrics and metrological techniques can be employed to test and find out if the analytical approach and conclusion is plausible.
Another category is history of events, such as the 1929 depression, financial turbulence in Asia, and etc. Such events do not occur frequently. It might happen once in many years, or twice in several years but each with a unique circumstance. This category of events does not provide continuous data and usually have complex causality.
When reading and analyzing such history, people might come up with drastically different interpretations. Thereupon, the issue of correctly understanding financial issue arises.
In regard to the background of the adoption of 1999 Banking Act in the U.S., Zhou Xiaochuan said that the 1999 Banking Act represented a negation of the 1934 Glass-Steagall as the latter was believed to be a misreading of the lessons of the Great Depression . Milton Friedman, a Nobel Economics Prize laureate, discussed in A Monetary History of the United State,1867-1930 co-authored with Anna J. Schwartz, the background, causes and effect as well as the logics of the Great Depression, and came up with a clear message that Glass-Steagall Act was a misreading of the lessons of Great Depression, and a wrong description for a wrong ailment. Ben Bernanke, the current Chairman of the Federal Reserve, is a follower of this school of thinking.
As for the methodology involved in correctly understanding financial events in the past, Zhou Xiaochuan went on to point out that every person was likely to have his or her own bias in interpreting history. This is especially true for a researcher, whose established approach and school might affect the methodology and perspective of analysis and interpretation and disturb the pursuit of a correct prescription.
Furthermore, factors like the personal experience of a financial event or even personal involvement in decision making and rescuing efforts, are not sufficient conditions for correctly analyzing and interpreting history. Academic research needs more careful thinking and testing, in some cases even time to test the conclusion.
Although Zhou Xiaochuan did not comment on which events were misreading of history or misinterpretation, he emphasized that the viewpoints of Nobel Prize winners might not be completely correct, and the winners have conflicting ideas among themselves. All these shall be tested by time.
Through an analysis of evolution of Japanese industrial policy and causes of financial turmoil in Asia, Zhou Xiaochuan offered three suggestions on how to learn the lessons of historical events in a better way. First of all, there should be more intensive and in-depth academic discussions. Research should not be constrained by judgments and viewpoints of competent authorities; secondly, the theories of different schools should be thoroughly analyzed and pondered; third, an objective manner should be adopted to analyze questions; in this process, best efforts should be made to remove personal bias.
With regard to the evolution of Chinese banking industry, Zhou Xiaochuan pointed out that lessons and experiences should be drawn in the review of the evolution of banking industry. In the past, other countries made mistakes in developing banking industry; it is very likely that the Chinese have made mistakes as well.
Therefore, we should find out through analysis what problems have occurred and what are the causes. He believes that an objective sum-up of past experience will produce an even clearer approach and better methodology regarding the evolution and future development of Chinese banking industry.
The Forum of 50 Chinese Economists is an independent academic organization. The theme of this meeting is Integration of Banking, Securities and Insurance Business: a Review of 20 Years of Development of Banking Sector in China. Wu Xiaoling, a member of Academic Committee of the Forum and Deputy Governor of the PBC, chaired the meeting.
