Our efforts to understand the causes of the Great Recession at times appear almost medieval. We diagnose through the lens of the seven deadly sins: the greed of the bankers, the sloth of the regulators and the gluttony of the consumer.
Instead we need to begin with the recognition that bubbles do not occur in economies that are failing. All that money that's going to be blown on tulips or real estate has to come from somewhere. Like fish that don't think about water because it's all around them, we have overlooked the enormous changes in our wired, globalized economy. We are not so much victims of sin as victims of our own success. We have gorged on the cornucopia of consumer goods shipped to our shores, and revel in the Internet's ability to connect, entertain or inform us.
Yet a globalized economy, in which all but a few renegade regimes participate, has been so successful in creating wealth that there are now vast pools of money that are put to work only to make bets on how other money will behave. And those wagers, thanks to the Internet, are placed with the same ease that we send e-mails.
Viewed from this perspective, financial reform begins to look like another major challenge of our time: climate change. Our phenomenal productive success has altered our economic as well as our physical climate. All this money is like a cloud of greenhouse gases that overheats the markets. In both instances the forecast calls for increased volatility: bigger storms, wilder gyrations in prices.
This suggests that our policy responses should be similar as well. Both begin with the recognition that there is no quick way to reverse the momentum of the changes we have unleashed, and that therefore our first priority should be to protect ourselves from the inevitable. The questions we pose are similar as well: We need energy, but why rely so much on fossil fuels? We need credit, but why rely on it from firms that speculate as well? But in the end, we will also hope that the same creativity that got us in these messes will lead us out of them as well.