What Failed in 2008?

To solve a problem requires not only knowing what to do, but also a willingness to change course if it turns out that one did not know quite as much as one thought. But the only true lesson of the 2008 financial crisis seems to be that its lessons will never truly be learned.

BERKELEY – To solve a problem, it is not enough to know what to do. You actually have to implement the solution – and be willing to change course if it turns out that you did not know quite as much as you thought. That is the message of two recent books that, together, tell you everything you need to know about the 2008 financial crisis: what caused it, what can be done to prevent it from recurring, and why those things have yet to be done.

The first book is The Shifts and the Shocks, by the conservative British journalist Martin Wolf, who begins by cataloguing the major shifts that set the stage for the economic disaster that continues to shape the world today. His starting point is the huge rise in wealth among the world’s richest 0.1% and 0.01% and the consequent pressure for people, governments, and companies to take on increasingly unsustainable levels of debt.

Meanwhile, policymakers were lulled into complacency by the widespread acceptance of economic theories such as the “efficient-market hypothesis,” which assumes that investors act rationally and use all available information when making their decisions. As a result, markets were deregulated, making it easier to trade assets that were perceived to be safe, but were in fact not. As a result, systemic risk proliferated beyond central bankers’ wildest imagination.

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