Prominent Economist Pens New Financial Crisis Book

Discussing his new book "The Shifts and the Shocks:What We've Learned-And Still Have To Learn-From The Financial Crisis,"former World Bank senior economist and current Financial Times columnist Martin Wolf said one of the lessons learned is how much can be hidden away in the strange crevices.Today there is more capital in the system than in 2008;there is a very chastened mood;some deleveraging of economies has occurred;the mood is a little bit of recurring optimism.That doesn't mean it can't become more fragile again.
The staggering complexity of the financial system made it difficult to foresee the crisis of '08-such as the shadow banking system,particularly in housing finance.Loans were packaged by intermediaries into very complex securities parceled out into tranches of risk.Huge new pools of investors bought these securities.These were replacements for the old,simple banking system.The whole thing started to be a house of cards.*
The regulators should have seen there was no single,overarching US regulator.The Fed thought there were no huge risks:these were grownups who could understand the risks they were creating,the Fed thought;but the capital structure encouraged people to hide the risks.*
The US economy now is roughly a sixth smaller,so getting inflation above the target is going to be particularly hard.It's very important to avoid deflation,so you have to keep rates low until the economy really recovers.Nobody wants to lend anymore.Banks only want to lend to people who won't spend it.There's no point in that.The fiscal position has tightened dramatically.The demand side of the US economy remains incredibly weak,meaning the world's economy is also.
The monetary policy might tighten a bit,but I think short term rates will not tighten to what we consider normal for a very long time.Ultimately we are headed for another financial crisis;the system isn't reformed enough.Here in the US,it won't be in this decade;I would be concerned about succeeding decades.The risks are there that,as soon as recovery starts,people will start borrowing again,and the structures for that are there,author Martin Wolf observed.