Data collecting needs to change to avert future financial crises

As talks continue on a bill to reform the financial sector, the Federal Reserve released a paper urging economists and regulators to look beyond well-established economic data collection to avoid another financial collapse.

While commonly used economic processes detected signals about the impending crisis, more "granular and "specialized information" could've been collected, according to the 42-page paper co-authored by Fed Vice Chairman Donald Kohn. 

For example, the paper says that data collected targeting solicitations to borrowers provided, "the best, and possibly the only, way to understand the rapid decline of underwriting standards for U.S. residential markets" prior to 2004. But that information most likely didn't exist and wouldn't have seemed worth examining before 2004, the paper said. 

While the paper's authors acknowledged the desire for more and better real-time data, they are positive that models will be developed to highlight emerging imbalances in the system. Those models require specialized research teams working with data tailored to specific areas that could show unusual trends, the paper said.

"We harbor no illusions about the difficulty of collecting all the "right" data in a timely fashion, particularly because the dynamic nature of our financial system implies that the relevant set of data is a moving target," the paper said. 

Major data collection takes time to design and put into action and are usually implemented with the idea that the systems being examined are inherently stable over time. 

"More fundamental, in our view, is the need to use data in a different way -- in a way that can deliver more flexibility in targeting than static data collection can allow," the paper said. 

The paper is expected to be presented at the fifth European Central Bank conference on central bank statistics, which runs Thursday and Friday in Frankfurt, Germany.