What We Still Have To Learn From The Financial Crisis

Martin Wolf, Chief Economics Commentator and Associate Editor, Financial Times

Martin Wolf, "What We Still Have To Learn From the Financial Crisis"

Too much has already been said about the purely ‘financial’ aspects of the global financial crisis, according to Martin Wolf. Such an emphasis mistakes symptoms for causes, which lay in the interaction between huge shifts in the global economy and our inherently fragile financial system. What have we learned and, above all, what do we still need to learn in order to prevent another crisis? What are the needed changes in the global economy? And what still needs to be done to make the financial system less fragile?

Martin Wolf’s latest book, The Shifts and the Shocks: What We’ve Learned – and Have Still to Learn – From the Financial Crisis, will be available for purchase and signing after the program.

Speaker Bio


Joseph Stiglitz, “Martin Wolf’s ‘The Shifts and the ShocksFinancial Times, 8/29/14

Noah Gordon, “The Conservative Case for a Guaranteed Basic Income,” The Atlantic, 8/6/14

Martin Wolf, “Bad Advice from Basel’s Jeremiah,” Financial Times, 7/1/14

Floyd Norris, “After Crisis, A new Spirit of Reining in the Banks,” The New York Times, 5/29/14

Martin Wolf, “Experts Broadly Positive on Global Recovery but Warn Risks Remain,” Financial Times, 5/11/14

Martin Wolf, “A Ripple of Hope in a Stagnant World,” Financial Times, 4/29/14

Julia Ioffe, “Call of the Wolf,” The New Republic, 9/16/09

Read more commentary by Martin Wolf in the Financial Times.


5:30 p.m.
Registration and cash bar reception

6:00 p.m.
Presentation and discussion

7:15 p.m.
Adjournment and book signing

7:30 p.m. 
Invitational Dinner with Martin Wolf

Event Summary

Event Summary By Senior Fellow Richard C. Longworth

Martin Wolf told The Chicago Council Tuesday evening that the Great Recession revealed a flawed economy guided by a now-discredited “old orthodoxy” of economic thinking. Unhappily, he said, the “new orthodoxy” reforms the old system, but doesn’t transform it, and new crises seem certain.

The Recession, he said, was “a gigantic disaster with a very weak recovery“—even weaker in Europe than here. Seven years later, “we have basically the same financial system,” mildly reformed but still too highly leveraged, too concentrated, and too global, with the same international imbalances that led to the implosion of 2007-08.

Wolf, a regular Council visitor, is the chief economics commentator for the Financial Times. His latest book, The Shifts and the Shocks: What We’ve Learned—and Have Still to Learn—from the Financial Crisis—is a sweeping probe into where the economy is now and where it‘s going.

His speech summarized the book’s conclusions and recommendations. He urged major reforms, not to undermine capitalism and globalization but to save them from themselves. As in the book, he held out little hope these “radical” reforms will be adopted.

Wolf began by asking whether we fixed a broken economy or whether further crises loom. His answer:

“Unfortunately yes, we can expect further crises. We continue to have a very fragile global economy.”

Wolf’s book is scathing toward the Chicago School of economics and toward Federal Reserve Bank Presidents Alan Greenspan and Ben Bernanke as prophets of “the great moderation,” a belief that the orthodoxy of the past 40 years—liberalized financial markets, globalization, decreased regulation, an emphasis on low inflation, funding from the vast capital glut in China and other countries—produced unending stability.

“We know how this ended,” he said dryly. He cited another Chicago economist—the late Chicago-born Hyman Minsky, who never won a Nobel Prize—as the true prophet.

Minsky taught that “stability destabilizes.” At some point in a stable economy, there comes a “displacement event” that leads to investment, leading to more investment, leading to euphoria, leading to over-leveraging, inevitably leading to a bust.

“This is precisely what happened,” Wolf said. In this case, he said, the “displacement event” was the decision by China and other countries, after the Asian financial crisis of the1990, to build up their huge savings. This glut drove down interest rates. The Chinese money, loaned to the United States, went into housing and the sub-prime mortgage market.

“The financial sector was off its leash,” he said. He suggested that this Chinese money produced not only the housing bubble but covered up unsustainable flaws in the US economy stretching back into the 1990s.

Since then, he said, we have had six years of near-zero interest rates—an unprecedented run of “global free money.” The results are uninspiring.

Europe and Japan are in “a contained depression.” In Europe, output is still 2.5 percent below the pre-crisis peak. The United States, now 8 percent above its peak, has done better, thanks to faster action by the Fed and to a stimulus package that restored some of demand lost when the private sector collapsed.

Basically, Wolf said, the US crisis ended in a year, with a financial sector that “is functioning—not great, but functioning.”

“When the crisis really hit,” he said, “the US federal government showed why Alexander Hamilton created it. It’s useful to have a government.”

The Eurozone, by contrast, had a single currency but no single government, leading to a chaotic response, as the US would have had if it needed agreement between 50 governors.

Despite the relative success, the recession’s impact on America is cruel and possibly permanent, Wolf said. American gross domestic product is still 18 percent below what it would have been if the pre-crisis trend had continued. This enormous loss may never be made up, he suggested.

In the aftermath, a “new orthodoxy” has emerged. He said it looks too much like the old one. Inflation targeting is “unchanged.” There’s been no large-scale debt restructuring. Especially, the Fed’s monetary policy has carried the weight, because the US, after the initial stimulus, “ruled out a serious use of fiscal policy, especially public investment,” leaving demand weak.

The same financial system persists, he said, with even more concentration in 25 big global banks. Leverage is still too high and too dependent on global financing. There has been more bank regulation, but it is “massively more regulated.” The Dodd-Frank bill could reach 30,000 pages— “a demented way to proceed.”

“We shouldn’t regulate the same system,” he said. “We should move to a new system.”

Wolf urged more government stimulus now, to spur demand. In the long run, he said, reforms should protect the financial sector from the “Minsky cycle.” He urged a sharp increase in banks’ capital requirements—the money that banks must hold in reserve against losses. He also decried risk weighting, which banks have used to assess the risk—and therefore the necessary reserves—of different classes of loans, which enabled them to lower reserves while increasing leverage.

Banks will oppose these reforms, and Wolf indicated they may fall victim to political pressures.