The financial crisis was not a crisis of capitalism or globalisation. Instead it is a crisis of the “deep Keynesian project”, according to which the aim of economic policy should be the maximum smoothing out of fluctuations in the real economy (as long as consumer price inflation is kept under reasonable control). While the tools of this policy approach were very different in the boom years preceding the crisis from traditional Keynesian ones, relying more on monetary than on fiscal policy, the fundamental aim was quintessentially Keynesian. The crisis is the logical outcome of the success of this policy for almost 20 years.
What drives the market is the balance between fear and greed. If economic policy eliminates fear, only greed remains, and there is no mechanism to limit “irrational exuberance”. This was the fundamental cause of the crisis. Moral hazard and herd behaviour are natural consequences.
The essence of global monetary policy before the crisis was the “Greenspan put” – the perceived attempt of the then Federal Reserve chairman to prop up the securities markets by lowering interest rates – which now threatens to become the “Bernanke put”. The natural state of capital markets from which fear has been removed is the generation of asset bubbles. If global policymakers do not realise this, bubbles are likely to proliferate through carry trade from the US and other countries with minimal interest rates and weak currencies.