The Bright New Financial System
The Bright New Financial System

Summary/Abstract: By the end of 2008, Mr. Paul Volcker gave financiers a devastating critique. “For all its talented participants, for all its rich rewards” he said, the “bright new financial system” has “failed the test of the marketplace”. In light of the events of recent weeks, it is hard to disagree. A financial system that ends up with the government taking over some of its biggest institutions in serial weekend rescues and which requires the promise of 700 billion dollars in public money to stave off catastrophe is not a trustworthy system. The disappearance of all five big American investment banks – either by bankruptcy or rebirth as commercial banks – is powerful evidence that Wall Street failed “the test of the marketplace”. Something went wrong. But what exactly and why? A more serious analysis needs to distinguish between three separate questions: what is Mr. Volcker’s “bright new financial system”? Second, how far was today’s mess created by instabilities that are inseparable from modern finance and how far was it fueled by other errors and distortions? Third, to the extent that modern finance does bear the blame, what is the balance between its costs and its benefits and how can it be improved?

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