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While the prevailing multilateral system will try to reconstitute itself, China will expand on a bilateral basis. China is, of course, part of the multilateral system but it does not occupy within that system a position that is commensurate with its current strength; therefore its participation in the international financial institutions is rather passive and its active expansion is likely to go through bilateral channels. For instance, China will complain about the role of the dollar and will promote the role of Special Drawing Rights but it is unlikely to allow the renminbi to become freely convertible because that would destroy the mechanism that has allowed the state to harvest the fruits of cheap Chinese labor through an undervalued currency. China will continue to maintain capital controls but will establish bilateral clearing accounts denominated in renminbi with countries like Brazil. This will diminish the status of the dollar as the international currency without replacing it.

Just as at the end of the Second World War, we are at the end of an era, but this time, we are not fully aware of it. Neither of the currently available alternatives is attractive. The Washington Consensus has failed. International capitalism in its present form has proven itself inherently unstable because it lacks adequate regulation. It is also highly unjust. It favors the haves over the have nots.

And here is another painful thought that Harvard historian Niall Ferguson often emphasizes: many of the leaders and legislators who are passing judgment on new rules for banks are the same leaders and legislators who oversaw the regulation in the run-up to the financial crisis.

I am often asked why economies get themselves into such a bind again and again throughout economic history. Unfortunately, as Reinhart and I document empirically for hundreds of financial crises, covering 66 countries and eight centuries, the answer is all too simple: arrogance and ignorance. Investors and policymakers are often altogether ignorant of the myriad historical experiences with financial crises. And the few that are dimly aware of what has happened in other times and other places all too often say, “Don’t worry, this time is different.”

And if there ever was any doubt that we got ourselves into a truly global economic environment in the last decade or so, those doubts were put to rest with -- on September the 15th and immediately thereafter of 2008.

On top of this, we had a $17-trillion decline in the market value of listed stocks around the world.  This happened in six weeks, and it disabled the financial intermediary system.  Because remember what that system is all about.  We have got, in corporations -- and, in fact, in any borrowing institution -- a capital buffer which exists that supports the debt.  Debt ratings of any company or any institution are a function of how much capital buffer there exists at market values.

It is very evident to me for example that the amount of capital that the financial intermediaries were required to hold, in a regulatory sense, was much too low despite the fact that there's a very famous sentence or two, in a Spring 2006 Federal Deposit Insurance Corporation document, which said more than 99 percent of insured institutions met or exceeded the highest regulatory standards of the regulatory agencies.

One year later, that was trashed completely.  So the question is, did we have too low capital?  The answer is unquestionably yes.  A great deal of the problems that can -- that are there and which are broken and have to be fixed.  In other words, I'm arguing that we have to repair the system.

It is broken, but that doesn't mean we replace it.  And that means significantly higher capital.  It means that we do numbers of things, like for example trying to get an increasing proportion of derivatives standardized and put on centrally clearing systems or on exchanges.

The critical problem that we have, which we've got to resolve, is the too-big-to-fail issue.  That is to me the major issue which is, if we do not confront it, we are going to be in terrible shape.  Because remember, the purpose of a financial system is to take the scarce savings of a society, plus what it may -- the savings it may borrow from abroad, like our current account deficit, and invest them in a  manner in which physical assets are produced that create the highest rate of growth and output per hour.

To the extent that you use those savings to prop up obsolescent companies or obsolescent industries or those which are too big to fail, which almost by definition are obsolescent, that savings is not also available for cutting-edge technologies which create the advances in productivity and, therefore -- (word inaudible) -- standards of living.