In a theater, it happened that a fire started offstage. The clown came out to tell the audience. They thought it was a joke and applauded. He told them again, and they became still more hilarious. This is the way, I suppose, that the world will be destroyed – amid the universal hilarity of wits and wags who think it is all a joke.
The 2008 financial crisis didn’t materialize out of thin air—and neither will the next one. The worst financial crisis since the Great Depression was caused by policy errors that encouraged economic actors to borrow too much and spend or invest the money unproductively—and the next one will follow the same script. Surveying the debris of their work after the crisis, politicians, central bankers and regulators swore they would never allow such a crisis to happen again. Predictably, their promises were broken virtually the moment they were uttered.
By the time the first edition of this book was published in early 2010 under the title The Death of Capital, financial markets had stabilized but economies were still struggling to recover. Almost six years later, they are still struggling—except the world is much more leveraged, the geopolitical landscape is much more fractured, American politics are more divided, and policymakers have run out of answers.
Post-crisis economic reforms followed two paths: heavy regulation and activist monetary policy. Both of them missed the mark because neither ...