Working Paper Research - Nationale Bank van België

and in the banks. I speak from experience, since in my earlier incarnation, I played a role in puttingone of these funds on the market" (Lamfalussy, 1983, p. 2).Contrary to general opinion, Lamfalussy very quickly took a cautious attitude towards financialinnovations. At the Bank of England conference in May 1983, Banking Supervision CommitteeChairman Peter Cooke said, according to Lamfalussy, that supervisors never question whetherfinancial innovations are a good thing. Lamfalussy (1983, p. 4) replied, "Well, in some of my morecourageous moments, I do". He further confessed that, "It doesn't seem to me intuitively obviousthat, on balance, financial innovations are a good thing". Lamfalussy did not question that financialinnovations could improve efficiency and help protect market participants against uncertainty 56 .However, in his opinion, financial innovations also create problems, especially for monetary policymaking,"if the result is that we end up in a monetary policy mess, and therefore major policymistakes ... then I begin to have doubts about the balance of pros and cons" (Lamfalussy, 1983,p. 4) 57 .In the following years, Lamfalussy would become more and more cautious about financialinnovations, not only their impact on monetary policy, but also their effects on the efficiency andstability of the financial system. In a certain sense, Lamfalussy always kept a "Keynesian"Weltanschauung, with a certain scepticism about the functioning of markets 58 . In a conference inAmsterdam, Lamfalussy (1984) argued in favour of a research programme in the field of "normativefinancial economics", referring also to Tobin's Fred Hirsch memorial lecture, which raised questionsabout the efficiency of the financial system (Tobin 1984) 59 .5.3.2 Financial innovations and financial fragilityIn January 1985, at the invitation of Charles Kindleberger, Lamfalussy was the speaker at a jointluncheon of the American Economic Association and American Finance Association. The topic was"The changing environment of central bank policy" (Lamfalussy, 1985a). Financial fragility was oneof the main themes of the presentation.Lamfalussy emphasised that the financial systems of the Western industrial countries were in themidst of several interconnected evolutionary processes, like disinflation, internationalisation,innovation and deregulation. Lamfalussy started with the disinflation process. He stressed that theprocess of disinflation was going slowly, which implied significant uncertainty regarding futureinflation rates. He was very concerned about the implications of this slow disinflation for the56 Later, he would become more cautious on these issues.57 His other concern was that people who are protected against inflation may feel able to live with it (thetraditional German concern with the indexation of securities).58 Lamfalussy remarked, at a conference in Brussels, that economists generally adhere to a "principe - oud'un acte de foi que je ne partage pas - que le marché sait mieux que quiconque quel est le prix correctd'un actif financier et qu'il ne convient donc pas de polémiquer avec lui" ("principle - or an act of faith that Ido not share - that the market knows better than anybody what the right price of a financial asset is and sothere is no point in arguing with it" (Lamfalussy, 1985c, p. 5)59 Lamfalussy knew Tobin from his time as a visiting professor at Yale in 1961-1962.19