This is a radical treatise from Martin Wolf, the chief economics commentator and associate editor of The Financial Times. He argues persuasively that policy makers should force banks to hold more equity, embracing the possibility that the financial sector could shrink drastically as a result. His agenda includes other widely discussed ideas, such as changing the US dollar’s global role and encouraging developing countries to insure themselves against fiscal crisis. While always politically neutral, getAbstract suggests Wolf’s clear language and intriguing arguments to financial professionals, investors and executives.
A Shock to the System
The scale of the 2008 financial crisis wasn’t the only factor that made it so significant. Consider how it caught the political and economic establishment off guard: The large, rich economies that took the worst blows had been cruising along. They seemed to have solved their inflation problems and to have improved the performance of their profitable financial sectors through risk management and financial innovation.
The framework of mainstream neoclassical economic ideology had no place for the possibility of a complete market failure generating such a devastating financial crisis. “The insouciance encouraged by the rational-expectations and efficient-market hypotheses made regulators and investors careless.” Academia marginalized economists whose thinking accounted for such frightening possibilities – most famously the 20th century economist, Hyman Minsky, whose work described the boom-bust cycles inherent in economic activity.
“The Great Moderation”
Until the crisis hit, the main rule of monetary policy was that a country could prevent excessive booms by keeping inflation in check. Control inflation...