There are several odd features about current financial difficulties. They appear to have been initiated by relatively minor problems, rising defaults in a subsection of the US housing market, when the world’s economy was otherwise in splendid shape. If this is enough to cause the financial system to have a “heart attack”, there must be underlying systemic problems. What are these?

First, there is a lack of information and transparency. Regulators, in their financial stability reviews, have been complaining for years that financial innovation has made it difficult for them to observe where risk has become concentrated. What was overlooked was that it made risk just as difficult for anyone else to observe. So once risk aversion started rising, everyone came under suspicion. How does one know how many structured investment ­vehicles your bank has tucked away off-balance-sheet?