Imperfect Knowledge

In the aftermath of the 2008 financial crisis, distrust in the financial sector was widespread. Even after the mess appeared to be cleaned up, the uncertainty over whether the worst was over remained real.

Finance is built on trust. It is based on promises about tomorrow, often paper promises backed by nothing other than words on a page. When trust in those promises breaks down, so too does the financial system. That is the lesson of thousands of years of history.

“You are now leaving the world as you know it.”

Sadly, it is questionable whether the economy has really improved.

what would measures of systematic risk have indicated to Treasury Secretary Paulsen if they had been available at that time?

Five years after the collapse of the U.S. investment bank Lehman Brothers, the world has still not addressed the fundamental cause of the subsequent financial crisis – an excess of debt. And that is why economic recovery has progressed much more slowly than anyone expected (in some countries, it has not come at all).

What happens when professionals lose touch with the people they’re supposed to serve?

These are extraordinary times for central banks. Near zero interest rates and massive liquidity injections are still failing to bring life back to so many economies in the developed world.

Innovation. The word is evocative of ideas, products and processes which have somehow made the world a better place. Prior to the global financial crisis, many viewed financial innovation as unequivocally falling into this category.

The exteriors of major central banks may be solid marble and doric columns, but, inside, monetary policy remains a work in progress.

A core puzzle in Önancial economics is the inability of standard risk-premium models to account for excess returns in currency and other asset markets.

There is much anecdotal evidence in the popular media, backed up by survey research, that participants in currency markets pay close attention to fundamental economic variables in forming their forecasts of future exchange rates.