CAMBRIDGE – Everyone from the Queen of England to laid-off Detroit autoworkers wants to know why more experts did not see the financial crisis coming. It is an awkward question. How can policymakers be so certain that financial catastrophe won’t soon recur when they seemed to have no idea that such a crisis would happen in the first place?
The answer is not very reassuring. First, the fact is that economics tells us much more about a country’s vulnerability to financial crises than it does about the timing. Second, there is every reason to worry that the banking crisis has simply morphed into a long-term government debt crisis.