Traders work on the floor of the New York Stock Exchange (NYSE) on September 25, 2014 in New York City.

Traders work on the floor of the New York Stock Exchange (NYSE) on September 25, 2014 in New York City.

Martin Wolf’s column in the Financial Times has been called “required reading for the international financial elite.” The former World Bank economist has a new book about the global financial crisis. Wolf criticizes the policies that caused it as well the responses to it. He calls for abandoning the orthodox thinking that led policymakers to completely miss the signs of the oncoming meltdown. He talks with Diane about why the global financial system remains so fragile and what can be done to strengthen it.


  • Martin Wolf Associate editor and chief economics commentator, the Financial Times; author of "Fixing Global Finance" and "Why Globalization Works."

Read An Excerpt

From “The Shifts and the Shocks” by Martin Wolf. Reprinted by arrangement with Penguin Press, a member of Penguin Group (USA) LLC, A Penguin Random House Company. Copyright © Martin Wolf, 2014.


  • 11:06:54

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Martin Wolf's column in the Financial Times has been called required reading for the international financial elite. The former World Bank economist has a new book about the global financial crisis. He criticizes the policies that caused it, as well as responses to it. He calls for abandoning the orthodox thinking that lead policymakers to completely miss signs of the oncoming meltdown.

  • 11:07:30

    MS. DIANE REHMHis book is titled "The Shifts and the Shocks: What We've Learned and Have Still To Learn From The Financial Crisis." Martin Wolf joins me and throughout the hour, we'll take your calls, 800-433-8850. Send us an email to Follow us on Facebook or send us a tweet. And it's good to have with us, Martin Wolf.

  • 11:08:02

    MR. MARTIN WOLFIt's a pleasure to be here.

  • 11:08:03

    REHMThank you. Give us your sense of the health of the global financial system right now.

  • 11:08:14

    WOLFIt's really actually very difficult to do so and one of the lessons I've learned from the crisis is how much can be hidden away in strange crevasses because that's what we learned during the crisis, aspects of the system we never thought about. AIG, for example, what it was doing, we didn't know about. So I don't know what is in there, but the impression one gets at the moment, as an external observer, is that it is healthier than it was in a number of obvious respects.

  • 11:08:44

    WOLFThere's more capital in the system. There's certainly a very chastened mood among financiers anyway. There's been some deleveraging of economies, notably so in the U.S. Less debt being out, largely because of a lot of bankruptcy, very painful for householders in particular and the mood is beginning to be a little bit of recurring optimism. So right now, the system looks more robust than it was before the crisis in retrospect, but, of course, that doesn't mean it can't become more fragile again.

  • 11:09:23

    REHMNow, as I understand it, there is news on AIG as of today. What is that?

  • 11:09:35

    WOLFWell, this is a complex legal case and since I'm neither an American nor a lawyer, I'll probably never get to the bottom of it. But in essence, as I understand it, shareholders of AIG, lead obviously by Hank Greenberg, are complaining about the terms on which the government bailout was made of their business, arguing that it was unfair and the losses imposed upon them, the shareholders, were excessive.

  • 11:10:07

    WOLFI must say that, though I am not an expert on this particular case and the law has always puzzled me, the conclusions it reaches, but it does seem to me a very strange case since if it were not for the government bailout, AIG would've collapsed completely.

  • 11:10:24

    REHMAnd stockholders would've lost everything.

  • 11:10:26

    WOLFWould've lost presumably everything. So my feeling is that they ought to be grateful to Uncle Sam, but apparently this view is not shared and the details of the legal arguments they will make are another matter. It is certainly true there is a legitimate complaint, and it's a big issue, was then and is now, whether it was right to bailout in full the creditors of AIG, the Goldmans and all the rest of them, who were made whole.

  • 11:10:55

    WOLFIt was a very famous or notorious decision taken by the decision-makers of that time. Remember this was still under the Bush administration. And, of course, one can debate that. But the case, as I understand it, seems to me a really quite strange one.

  • 11:11:12

    REHMHow did we get to the 2008 financial crisis with nobody quite seeing it coming?

  • 11:11:27

    WOLFWell, this is, I think, the most important question. To be fair, there were a few people who saw it coming, though perhaps not in full, in all its gory details partly because, as I have indicated, one of the most important features of the financial system that evolved before the crisis was its simply staggering complexity. And I discuss that at length in my book. It was a new sort of financial system, particularly in the U.S., not uniquely so.

  • 11:11:53

    WOLFIt was unbelievably complicated. Risk was distributed around the system in ways that nobody really understood, certainly not the regulators. So it was difficult to foresee that mess because what had been created was new and so complex.

  • 11:12:10

    REHMTalk about the new parts that were missed.

  • 11:12:15

    WOLFWell, I can just give you a few examples, but this is what my friend, Paul McCulley who used to be at PIMCO, calls the shadow banking system. That essentially in the previous 10, 15 years, even more, a new structure of finance developed. This was particularly associated with U.S. housing and housing finance so people originated loans, institutions that weren't banks, famous institutions like Countrywide and so forth.

  • 11:12:47

    WOLFThey sold them on. They were packaged by intermediaries, mostly investment banks, institutions like that, into very complicated securities, which were then -- in whose -- the stream of income going through these securities from the ultimate borrowers were separated out into trenches, as it's called so the first losses -- some people bore the first losses. Other people bore the second losses and the third losses.

  • 11:13:21

    WOLFThose were then rated by the rating agencies who came up with the view that there were a great many AAA-rated assets inside these securitized assets. There was a tremendous demand. I discuss in my book why it's a global macroeconomic phenomenon for highly rated, but also better yielding paper than the standard AAAs like the government paper. So these were then sold to huge new pools of investors, many of them abroad, German, Landesbanken, and Norwegian local authorities, people nobody really heard of.

  • 11:14:03

    WOLFAnd some institutions that were very heavily engaged in it issued their own paper, very short-term paper that was particularly true of the broker dealers, the then five major broker dealers who created a new structure of complexity financed by the money market funds, which it were essentially -- all these were different ways of replacing in the end, and I could talk about it much more, of replacing the old banking system, which is a relatively simple structure.

  • 11:14:34

    REHMStraight forward.

  • 11:14:34

    WOLFAnd so when it started unwinding or collapsing, essentially because the asset prices against which this whole structure was built, house prices started to fall from, if I remember correctly, 2005, '06 onwards. Then, the whole thing started to turn out to be, to put it bluntly, a house of cards and...

  • 11:14:56

    REHMBut then, the question became who should've seen it coming, who should have been watching this complexity grow, which was ultimately going to become this house of cards.

  • 11:15:17

    WOLFWell, I think there are, I mean, there are many answers to that question. One set of people who should've seen it, I suppose, are the regulators, broadly defined, namely the Federal Reserve and others. And now here there were a number of very important issues arose. Firstly, the American regulatory framework was a patchwork of regulators. There was no single overarching regulator. That turned out to be very important.

  • 11:15:46

    WOLFFor instance, if I remember correctly, AIG, which is crucial in this because it insured certain sorts of debt, was regulated by the office of Thrift Supervision, which was a very minor regulator. But it's also true that the Federal Reserve, clearly far and away the most important regulator, took the view that there were no huge risks here. The only exception to this very famous one was a governor called Ned Gramlich, who died, in fact.

  • 11:16:20

    WOLFAnd there were, I think, two elements in that. The first was very much Alan Greenspan's view. And I must say a view that, to some degree, I had so I was part of this, not directly in the same way. Which was that these are all grownup people. They're experienced, as it were, responsible people. Turned out to be wrong. And they could understand the risks they were bearing and creating and therefore they would manage the risk better than anybody else.

  • 11:16:48

    WOLFThe second thing, which is perhaps more surprising -- and it did surprise me. And here there are some exceptions. Robert Shiller of Yale who got a Nobel Prize is one of the exceptions. Nouriel Roubini, of course, famously, is another. There was a general view extraordinarily widely shared in the U.S. that house prices, in general, could not fall. We tend to forget that now.

  • 11:17:10

    WOLFBut in the -- I remember very well in discussing with very distinguished people, it was not our experience in the UK, but that basically that a general fall in house price in the U.S. was impossible. And, of course, if you believe the collateral against which this whole structure was created cannot created in value -- and, of course, there was some very famous speculators who took the other view. We know that and they made fast fortunes. But the majority view was that.

  • 11:17:38

    WOLFWell, if you think that's true and you think that basically the financial sector knows what it's doing, you don't inquire too much about what the details. There is an additional factor that made this worse, that the capital rules that were being employed in the -- before the crisis encouraged people to hide a lot of the risk outside the banking industry. So even the banks themselves had huge off-balance sheet exposures.

  • 11:18:02

    WOLFThey were not included within the standard balance sheets, the so-called special investment vehicles and conduits of the banks, which then, when the collapse happened, suddenly had to be brought back onto the balance sheets 'cause the banks couldn't let them collapse.

  • 11:18:17

    REHMMartin Wolf, he is a columnist and chief economics commentator for the Financial Times. His new book is titled "The Shifts and Shocks: What We've Learned and Have Still To Learn From The Financial Crisis. Short break, right back.

  • 11:20:00

    REHMAnd welcome back. My guest this hour is Martin Wolf, associate editor and chief economics commentator for the Financial Times. He's also former senior economist for the World Bank. And his new book is titled, "The Shifts and the Shocks: What We've Learned -- And Have Still to Learn -- From the Financial Crisis." Which contemporary economist would you say you are closest to in your own thinking about what's happening to the world economy?

  • 11:20:47

    WOLFThat's actually a very difficult question to answer because I'm influenced by a number of economists very profoundly, but probably all of them would say they disagreed with me on some important things. And the group is quite eclectic. I'm -- I very much admire Joe Stiglitz, particularly I think he's got right and he was seminal -- and I discussed that in my book -- on the role of inequality in the debt accumulation, why there was this enormous explosion in debt in the U.S. in particular, but also elsewhere.

  • 11:21:27

    WOLFI was very -- I've been very influenced by the work of Ken Rogoff and Carmen Reinhart. Their book on "This Time is Different," is a seminal work in discussing how financial crises occur, how frequent they are, and the long, agonizing pain of deleveraging, which is what we are in. And it's what -- because of his -- their work and also a Japanese/Chinese economist called Richard Koo that I always expected the recovery will be very slow.

  • 11:21:56

    WOLFAnd I thought almost all economists, particularly here in the U.S., were much too optimistic about the speed of recovery. So they were very influential. And then finally I -- though I've had a lot of disagreements, I would emphasize that in the thinking about so-called secular stagnation and the underlying forces that are driving that, I have a lot of sympathy with what Larry Summers has recently been saying.

  • 11:22:17

    REHMExplain what you mean by secular stagnation.

  • 11:22:21

    WOLFWell, the idea that he is advancing, which was already in my book, but secular stagnation, which is actually a term invented by an American economist in the '30s in response to Keynesian economics. The idea is that there should be a prolonged, as it were, structural deficiency in demand in economy, so that you are permanently having to push demand through extraordinary loose monetary policy, which we're seeing. And it just goes on year after year after year.

  • 11:22:49

    WOLFYou never get a real demand take-off. That secular means -- it comes from the Latin word for a century. Something that goes on forever. And I must finally mention Bob Shiller -- whom I already have. I think his work on financial crises -- he was the seminal, you know, he was the person who saw the dot com bubble for what it was. He saw this housing bubble for what it was. Of all the distinguished economists I know, he's been the most prescient. So these are some of the people who have hugely influenced me.

  • 11:23:20

    REHMTell me how you feel about Ben -- Fed. Chairman Ben Bernanke's stewardship of the U.S. economy after the financial crisis.

  • 11:23:35

    WOLFWell, I think Ben Bernanke's role can probably be divided into three parts. First, very briefly, he clearly missed the -- what was happening. There's no doubt. He didn't understand the danger. And in that he was with others. Second, when the crisis hit, I think he understood its severity and as it got worse, particularly after September 2008, after Lehman's failure, I think his actions were extraordinary and extraordinarily brave.

  • 11:24:13

    WOLFAnd I do -- I am one of those people who believe that if they hadn't taken the actions they did, but it be the Federal Reserve, we had some real risks of suffering something like the Great Depression. I think the third part -- there's a big debate to be had whether the policy, both fiscal and monetary, was strong enough and supportive enough, as it were, from about a year out after the worst of the crisis.

  • 11:24:40

    WOLFSo that the -- that in the U.S. the recovery has been unnecessarily weak because demand -- because there were political constraints on fiscal policy, there was enormous resistance to doing much more on monetary policy. The so-called QE3, the last version which is just about to end, should have probably occurred earlier and been more aggressive.

  • 11:25:01


  • 11:25:02

    WOLFSo -- but, in all, in dealing with the crisis itself, as opposed to the precursors, I think we were unbelievably lucky to have had a man who understood what a depression really could be.

  • 11:25:15

    REHMWell, and that's what he kept going back to in his public statements. His own understanding and studious look at what had happened during the '30's depression. There has been this feeling ever since 2008, when the financial disaster occurred, that at all costs we must keep inflation low. There is such fear of inflation in this country that interest rates have been kept low for fear that any rise would create an inflationary bubble. What's your thinking?

  • 11:26:10

    WOLFWell, I see it as a slightly different story. I think the problem after the crisis was -- actually turned out to probably be a smaller worry, is that we would actually suffer deflation, so there would be falling prices. Because there was a huge rise in unemployment, the economy collapsed, and it was huge excessive supply so the real fear is that U.S. would become like Japan or worse.

  • 11:26:34

    WOLFSo they had to pursue policies that would promote demand. And that's why monetary policy has been so extraordinary loose for so long. So they have an inflation obsession alright. But the inflation obsession is keeping it up. Now there was a huge debate between, if you like, crudely the right and the left. And I -- on this I was on the left, which was the view that all these policies that the Fed were pursuing would lead to hyperinflation tomorrow.

  • 11:27:04

    WOLFThat the Fed, instead of just avoiding deflation, would create hyperinflation. Well, everybody on the right was arguing this. I had debates myself with people who were arguing for these ultra-loose monetary policies, the expansion of the Fed balance sheet would immediately lead to hyperinflation. That view was, in my view -- and I think the evidence is now clear -- completely wrong. But Mr. Bernanke had to operate in that context. So he perhaps didn't pursue as expansionary a policy as I think he should have done.

  • 11:27:33

    WOLFBut in any case, their aim was to avoid deflation. And actually if you look at that, they've been successful. Inflation has continued and that has meant -- very important -- that real interest rates have been kept very low, which is very painful to say because we understand that. But it does avoid a complete collapse of the balance sheets in the economy because people couldn't pay higher real interest rates.

  • 11:27:56

    WOLFNow, there is a debate among economists -- which I think you are hinting at -- Ken Rogoff is one of these, who says, well, actually we should have higher inflation. If we had higher inflation we would have even lower real interest rates. We would -- but that would be an even bigger tax on savers, by the way. And that's going to be very, very unpopular, since given the Baby Boomers are retiring.

  • 11:28:17

    REHMWait a minute. I don't understand.

  • 11:28:18

    WOLFNegative real rates are a tax on savers. It means that the interest rate you go -- you get does not compensate you for the rising prices. So if you -- that is the danger of going to higher inflation. It means prices of goods and services are rising at a rate which is faster than the rate of interest on your -- or of the return on your investments. So for those living on investments, pensioners, whoever they may be, a policy of negative real interest rates -- it's very good for debtors. It is a way of reducing the real value of debt, but it's very, very bad for savers and it's very unpopular.

  • 11:28:55

    WOLFIn any case, the monetary policy that will be required in this position of -- in my view -- a huge slump -- the U.S. economy now is roughly a sixth smaller, sixth smaller, 15 or 16 percent, than it would have been if the previous trend GDP had occurred. So there's a -- still a slump here. And in that situation, getting inflation up above the target was going to be really, really hard. So even if they desired it, they probably couldn't have achieved it.

  • 11:29:25

    REHMSo if you were in the seat of authority at the Fed right now, would you continue to keep interest rates where they are?

  • 11:29:44

    WOLFYes, I would.

  • 11:29:47

    REHMFor how much longer?

  • 11:29:49

    WOLFThat -- well, the answer to that is -- I mean, I'm pretty sympathetic to what Janet Yellen says. I would -- you have to keep -- it's very important to avoid deflation. It remains a risk. So the answer is you keep interest rates low until the economy really recovers. Now, then you ask me, well, how long will it be before the economy really recovers? And this comes back to this secular stagnation story. I'm increasingly persuaded that the underlying factors -- and it's an important part of the book -- generating very weak demand in our economy -- is a structural.

  • 11:30:28

    WOLFI mentioned some of them, but not all of them. The distribution of income is very, very important. So the people who might spend, are suffering steady declines in their real income. They can't -- the second one is, nobody wants to lend any more. They've been frightened. There's too much debt in the system. They only want to lend -- the famous line about banks most of the time -- they only want to lend money who don't want to borrow it. So the -- in other words, people who won't spend it.

  • 11:30:55

    WOLFThere's no point in that. Corporations are very unwilling to invest. That -- I think that's partly because of the structure of executive compensation. I think it's very -- a real problem. But I also think it's because they're in a slow-growing economy. In a slow-growing economy why should you make big investments? So they're not investing. So corporations are actually buying back shares, but they're not doing anything that is promoting demand.

  • 11:31:20

    WOLFAnd finally, the U.S. continues to run a large current account deficit. Not as big as before. And that's also a drag on demand. So if you add all these things together, finally the fiscal position has tightened dramatically. People mostly don't realize how big the tightening has been, partly because of sequestration. So the effect of all this is that the demand side of the U.S. economy is incredibly weak. My guess is -- and it can only be a guess -- it will remain so for a long time. It's going to be a little like Japan.

  • 11:31:50

    WOLFIt's even worse in Europe, which is a big part of my book. And that's important, too, because it means the world economy's demand is weak. And that affects the U.S., too. It's an open economy. So for all these reasons I think it's very likely -- even if QE stops next month -- which is expected -- that monetary policy will remain very loose for a very, very long time. I wouldn't know how long, but I think we are talking quite probably many years. It might tighten a bit, but I suspect short-term rates will not go back up to the sorts of rates we use to think of as normal for quite a long time.

  • 11:32:25

    REHMMartin Wolf. And his new book is titled, "The Shifts and Shocks: What We've Learned -- And Have Still to Learn -- From the Financial Crisis." And you're listening to "The Diane Rehm Show." Time to open the phones, take calls from listeners, 800-433-8850. First to Ann Arbor, Mich. Hello there, John. You're on the air.

  • 11:33:00

    JOHNDiane, I very much appreciate your taking my call. And I very much admire Martin Wolf, but I have fundamental disagreement with him. And I posted some things about that on your comments. I would like to deal with the shortened version of that, if that would be okay.

  • 11:33:23

    REHMVery quickly, please.

  • 11:33:24

    JOHNAll right. I would point out something that I think in terms of secular stagnation that's being overlooked that I think means that we're really in some serious problems. One is the fact that 10 of the last 11 U.S. recessions, including the latest, have been associated with oil shocks. Second, given the reality of peak oil, it really is different this time. And thirdly, as Professor Tim Jackson has put it, there is not macroeconomics for sustainability and there is an urgent need for one. And I think the profession -- good commentators like Summers and Wolf are overlooking that.

  • 11:34:07

    REHMMartin Wolf, do you want to comment?

  • 11:34:10

    WOLFYes. I think this is an important issue. Okay. The oil shock is significant. And it comes into my analysis on a macroeconomic point of view because it shifts income to oil producers who are high savers. And I think one of the main reasons that oil shocks tend to have this effect is that they shift income towards high savers. I'm not persuaded in this case for a whole host of reasons, which we don't have enough time to go into, but mainly because of the reduction in the energy intensity of our economy.

  • 11:34:46

    WOLFBut the tax on the productive sector, generated by the rise in oil prices -- which proportionately was much smaller than in the '70s and early '80s or '79 to '81 -- was that significant. Now, on peak oil, this is -- how does one put it? It's a very, very controversial question. And I'm not a geologist so I'm not going to get into the details of this. But many people would argue that at least it's been postponed at a gate or two by the shale energy revolution.

  • 11:35:18

    WOLFThis is quite a widely shared view. And it does seem to be consistent with the evidence we're seeing on the growth of production in the U.S., which is quite remarkable. It's becoming an exporter. So it would seem to me that's a -- those are issues for the medium term, not -- they don't affect the crisis now. Sustainability is a huge question. I've written vastly on climate change, for example, and energy policy issues.

  • 11:35:42

    WOLFBut again, the time horizons, in my view, are different. We should be addressing them, but they are not, in my view, causes, except for the one point I made about oil prices and income distribution -- for the crisis situation we're in now.

  • 11:35:56

    REHMBut as you said, you've written about the environment and concerns there. Do you have concerns regarding the environment and so-called fracking?

  • 11:36:10

    WOLFThat's -- the answer to that is, yes, I have concerns. But we haven't done any in the UK yet, but we're thinking about it. And so what I'm relying on is what is written about it in the U.S. I haven't seen the place.

  • 11:36:23


  • 11:36:25

    WOLFAnd what I have noticed is there is an intense and ferocious debate in the U.S. going on between the different interests, different sides. And I would have to say that at the moment -- not having experienced it firsthand -- I'm not in a position to decide whether fracking is an environmental catastrophe or a manageable risk. It could -- I could, it seems to me, be either. And I suspect the answer will depend on the specific environments, the specific vulnerabilities of where it's done. But obviously, if there is significant groundwater pollution in areas which are very vulnerable then that would be a big concern.

  • 11:37:01

    REHMHow do you think the UK will go on this?

  • 11:37:04

    WOLFI think our view is enormously cautious. I mean, partly -- the incentive structure is different because interest in the -- as I understand it. I don't know where this came from -- in the U.S. anybody who owns the land owns everything beneath it. And we don't.

  • 11:37:21

    REHMYou don't?

  • 11:37:24

    WOLFNot in the UK.

  • 11:37:24

    REHMInteresting. Martin Wolf. And his new book, "The Shifts and the Shocks." Short break here, more of your calls, your email when we come back. Stay with us.

  • 11:39:57

    REHMAnd we'll go right back to the phones, your questions for Martin Wolf. He's associate editor, chief economics commentator for the Financial Times, former senior economist for the World Bank. He's now written a new book. It's titled "The Shifts and the Shocks: What We've Learned -- and Have Still to Learn -- From the Financial Crisis." Let's go to Roy in Cincinnati, Ohio. Hi there, you're on the air.

  • 11:40:36

    ROYGood morning, Diane.

  • 11:40:37

    REHMHi there.

  • 11:40:37

    ROYFirst-time caller. Mr. Wolf is very informative and very enlightening but I would like his comments on after the Great Depression in the '30s, regulations were put into place to keep a recession from ever happening again. And over the past 40 years those regulations have systematically been repealed. And I don't understand where the surprise factor is in having another depression.

  • 11:41:09

    WOLFI think it's a very good question. The answer is that the people who did the deregulating and the people who watched it thought, as it were mistakenly -- I can explain a little why -- that this would not lead to dangers as great as those that occurred in the Great Depression. And this is partly because of a huge debate over what actually caused the Great Depression.

  • 11:41:38

    WOLFAnd the view, I suppose, emerged among interestingly economists as it were on the whole spectrum that it wasn't because of the fragility of the financial system but because of huge mistakes in monetary policy or in other regulations. The monetary policy view was particularly promoted by Milton Friedman, the monetarist of course who was very, very influential in that, his work on monetary history. And of course, as it were on the Keynesian side loosely used, using those terms, people believed the mistake was not to pursue an efficiently aggressive countercyclical fiscal policy.

  • 11:42:19

    WOLFAnd if they had done those things, the great depression need never have been so bad. So I think in retrospect it's pretty clear interest in this actually starts with the work of John Maynard Keynes. There's very, very few influential policy makers and thinkers really regarded the Great Depression as fundamentally a financial system failure. For that reason, they tended to ignore the dangers of deregulation.

  • 11:42:45

    WOLFThe one great exceptions was an almost completely disregarded economist whose work I myself only became familiar with some years ago, who was Hyman Minsky, who I didn't mention because he's been dead for 20 years nearly. And he was the one person who consistently said the financial system will generate its own instability. That's what we have to worry about. But that view, that sense of the risks almost completely disappeared among policymakers and academics. It is a remarkable phenomenon. And I have to say that I was part of that so I'm pretty shameful. One -- this book reflects my determination to learn.

  • 11:43:24

    WOLFSo I think the question is absolutely right and it shows -- it underlines something that a friend of mine used to say, that it's not true that you don't learn from history. You do and then you forget.

  • 11:43:34

    REHMAnd here's an email that says, "Your guest seems to have forgotten about Brooksley Born of the Commodity Futures Trading Commission who raised serious concerns about the financial house of cards but was opposed by the old boys' network headed by Alan Greenspan, Tim Geithner and Larry Summers."

  • 11:44:03

    WOLFTim Geithner wasn't really very much involved at that stage because we're talking about the end of the Clinton administration. So I -- was other figures including, I suppose, the Treasury Secretary Rubin. I think this is correct. She was certainly right. I haven't forgotten about her though that's part of a long history of U.S. regulation which isn't the focus of my book. It's just one chapter.

  • 11:44:29

    WOLFWhether great regulation of derivatives which she focused on particularly would have prevented this crisis is, I think, a very interesting and complex question because there were lots of problems that arose in the financial sector which were not directly or only to some degree related to derivatives. And how they would actually have been regulated, because the financial sector was inventing all these things, and whether they would've been regulated more effectively is very much an open question. A lot of the derivatives business worked perfectly well. Some of it didn't.

  • 11:45:12

    WOLFSo the impulse behind her questioning was clearly absolutely correct. She was vindicated. But whether if they had followed her advice, the crisis would ultimately have been prevented, I doubt And that's a core part of my book we haven't discussed at all. But there were macro economic conditions in the world, some of which I touched upon which were, in my view, virtually bound to generate financial instability somewhere. And if we ignore those underlying conditions we miss some of the truth.

  • 11:45:38

    REHMHere's an email from Mitch. "Did the banks' manipulation of Libor skewing it down so they look healthier than they were blind the bank regulators to systemic risk in 2008?"

  • 11:45:58

    WOLFI think, no. The Libor rigging was costly to borrowers. There's no question about that, and it shouldn't have happened. But if you look at the crucial moments in the crisis, Libor exploded upwards. The evidence of stress in the interbank market was absolutely clear as the crisis unfolded, which is all you needed to know. And though, as it were, the major was not perfect, it was only defective to some degree. I don't think it really confused the regulators who were looking at this to any significant degree. Once interbank borrowing stopped, it stopped.

  • 11:46:40

    WOLFNow there is a big issue, how do you price interbank borrowing, which is what Libor was supposed to do when there wasn't any happening. And that's really quite an intriguing fundamental philosophical question which also indicates the deep flaw with the whole measure. They were measuring something which was actually not even an event at that time.

  • 11:47:00

    REHMAll right. Let's go to William. He's in Charlotte, N.C. Hi, you're on the air.

  • 11:47:08

    WILLIAMYes, ma'am. I was going to ask in regard -- it was a similar question to what the gentleman said about the deregulation aspects, but it was more specific to Glass-Steagall which separated commercial and investment banking. And it seemed like the deregulation was kind of an encouragement of economic anarchy to a certain extent. But I was curious as to whether or not the reinstitution of a separation of investment banking and traditional commercial banking would help insulate us from...

  • 11:47:39

    WOLFWell, the answer to that is I think it would be sensible and not only sensible. In a slightly different way I was involved in the UK's -- was a member of the government's independent commission on banking that was set up in 2010 to recommend policy changes. And one of the changes we recommended didn't go quite as far as Glass-Steagall was that the retail banking or commercial banking arms of the major British banks be fully and completely separated in terms of capital and separate boards, separate managements from the rest of the banking group. Above all, crucially would not be allowed to lend to or borrow from the rest of the group so they would essentially be sealed within the group in order to bring about the stability that you point to.

  • 11:48:30

    WOLFIt does seem to me that the complete integration of the balance sheets and the activities of retail and investment banks or commercial investment banks within single organizations creates a number of quite significant risks and dangers that those take a long time to discuss. And separating them out makes sense. However, going back fully to a Glass-Steagall world is really quite difficult in the current environment where so much financial activity occurs outside commercial banks.

  • 11:49:04

    WOLFYou would still have the problem that in a way that wasn't true even 70 years ago that so much intermediation, financial activity occurs in outside commercial banks. And if that collapses, the government's bound to be interested because it's going to affect the economy in an enormous way.

  • 11:49:21

    REHMHere is an email saying, "Despite the recovery of the U.S. economy from the brink of collapse, people have largely ignored the Herculean task that faced the administration and just how good President Obama has been for the economy. Forbes magazine just published an article in which is recognizes the Obama Administration s the fourth best president for the economy ever. Blame must be placed where it's due with the corporate leadership that prefers to cut salaries and seek inversion as a way to increase their profits, cut pensions and keep wages at historic lows. The Obama Administration deserves admiration on the economic turnaround." Would you agree?

  • 11:50:25

    WOLFInterestingly, I would largely agree. I've written pieces, I think, that obviously in America now it's a divided country and he's a divisive figure. But I have -- I think he did a remarkable job in steering the economy or help it out of catastrophe. He inherited the catastrophe, which everybody seems to have forgotten. He inherited the fiscal deficits. He didn't create them. He was consistently thwarted, in my sense, from outside in trying to do sensible things to promote more employment and so forth.

  • 11:51:03

    WOLFThe only -- I think there are a whole host of things one can disagree with nonetheless. Now some of those are details which I won't go into, but I think that he was advised that the recovery -- by some that the recovery will be stronger than it was. I think that made life a little bit more difficult for them when they became obvious that it wasn't going to be so strong.

  • 11:51:26

    WOLFBut on balance it seems to me that the performance, given the immensely poisonous legacy they've got and which is still out there, the immense amount of debt that is still out there which they couldn't easily get rid of, nobody helped them, they tried to but they didn't get any help on that.

  • 11:51:44

    WOLFSo I think that in these circumstances they did very well. And there's a very simple indication. If you look at all the major economies of the world, except Canada which is sui generis, the U.S. recovery has actually been the strongest of all of them, much stronger than any of the European countries, much stronger obviously than Japan. That seems to me a pretty commendable performance. So I agree with the basic thrust of your point.

  • 11:52:07

    REHMHow would you compare or contrast your views on economic matters to those of Paul Krugman?

  • 11:52:19

    WOLFThere are lots of issues on which I agree with Paul, certainly broadly on fiscal policy. He writes a lot on the American politics, which adversely I'm not going to do. I have a view that one shouldn't write -- comment too much on the politics of other countries, even ones as important as the U.S. So I try to constrain my enthusiasm on that. But I think his analysis of the policy options after the crisis being pretty reasonable and I have, broadly speaking -- I should have mentioned him -- agreed with the lines he's pursuing that are obviously differences of nuance and emphasis in different ways.

  • 11:53:02

    WOLFHe's inevitably, and understandably, much more polemical than I would be in the U.S. context, and he's partly the context, but I think he's got a lot of it right.

  • 11:53:11

    REHMAnd you're listening to "The Diane Rehm Show." Do you think that there are ways right now to make the U.S. economy more robust considering what's going on around the world?

  • 11:53:36

    WOLFI think it's very difficult to do anything within -- anything which would regard as conventional policy. And to go beyond it would involve, I think, sort of revolutionary reconsideration of what you're doing. And I do discuss some of that in the book. But within anything that's sort of orthodox policy, it's really difficult.

  • 11:53:57

    WOLFI mean, my own view, which I've shared with actually almost everyone we've mentioned, is that the crisis was a tremendous opportunity because of the low interest rates and the slumping construction, to start a huge infrastructure investment program in the U.S. There's a tremendous backlog of investment here. Everybody knows that. I thought the crisis -- the recession would last many, many years. So the time to start that was back right at the beginning of the administration in 2009. Now it would really be going. It could be a forwarded interests were very low.

  • 11:54:30

    WOLFSo I still think that was a tremendous missed opportunity. And whether it could -- it's worth doing now I don't know, but it might be worth doing something.

  • 11:54:37

    REHMDo you think we are headed for another financial crisis?

  • 11:54:43

    WOLFUltimately yes. The system is not sufficiently reformed to prevent that but not, I think, in the near term.

  • 11:54:52

    REHMWhat does that mean?

  • 11:54:54

    WOLFIt means that at least in the U.S., though there are other places, there are huge risks in other places of the world, Europe still, China, but leave that aside. In the U.S., it doesn't seem to me likely that the financial system is anywhere near fragile enough and optimistic enough. You know, euphoria precedes crises. To generate a financial crisis in this decade I would be worried more about the succeeding decades.

  • 11:55:26

    REHMYou're talking about Alan Greenspan's irrational exuberance in the stock market.

  • 11:55:34

    WOLFYes. But it's not -- I don't think the stock market will be the problem. The problem is always leverage. It's always debt. It's the interaction of big shocks with a highly leveraged economy that generates really gigantic crises. And the -- there is too much leverage now but it's much less than it was in 2008. And so it will take a while before we get back into that sort of state.

  • 11:56:02

    WOLFBut the risks of that -- because as soon as growth really restarts it's almost inevitable given the structure of the demand here, people will start borrowing again very heavily. And that debt burden will get very great.

  • 11:56:14

    REHMSo you would change the structure.

  • 11:56:17

    WOLFYes. I think that -- as I said, the policies that I will pursue if one didn't have political constraints would -- you will try and deal with income distribution questions. That's pretty important. I would really try to change the tax treatment of debt. There's too much debt in the economy. I would -- and I think there is some huge questions about corporate governance and whether corporations are being run in the interest of the economy.

  • 11:56:47

    REHMMartin Wolf. His new book "The Shift and the Shocks: What We've Learned and Have Still to Learn From the Financial Crisis. Thank you so much for being here.

  • 11:57:02


  • 11:57:03

    REHMThanks for listening all. I'm Diane Rehm.

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