– Paul Blustein is a journalist-in-residence at the Brookings Institution. He is writing a book on the World Trade Organization, which will be published in September. The views expressed are his own. —
The Great Debate
The shadow banking system in Europe isn’t so much dead as being kept on life support by banks and central banks in what amounts to a desperate but risky attempt to avoid the reckoning.
It is time to add another victim to the ever-growing list of institutions (Bear Stearns, Lehman Brothers) and theories (value at risk, fair value accounting and originate to distribute) which have been tested by the financial crisis and found wanting. The central bank practice of inflation targeting — the jewel in the crown of modern monetary economics — has palpably failed.