SB: You're right.

EH: And we had that terrible depression in the 1930s, we had great inflation in the '60s and '70s, and stagnation in the 1990s in Japan, and a series of currency crises - the IMF just did a study of 124 currency crises since 1980 - and we are now in the middle of another crisis where we haven't got the monetary system right. The only consistency is that the central bankers have repeatedly said, "Now we've finally licked this problem," and they have been proven wrong. I roughly count four paradigms of monetary policy that have been discredited in the last century. Perhaps we will get there, but it certainly is one of the sore spots of the modern economy that the monetary system seems to go haywire.

SB: I don't want to argue with you. An oldfashioned chairman of the Fed, who was, if you like, a moralist, William McChesney Martin, said that the object of the central banker was to take away the punch bowl just as the party gets going. Now I'm afraid when I was younger I sneered at this too, but he was replaced by Keynes and monetarists and all sorts of people who thought they knew the answer. He was sneered at partly because of the Old Testament vocabulary, but partly also because people didn't know how you measured when the party was going too far or what the technical equivalent of the punch bowl was. Now, however, McChesney Martin does not look such an old fogey after all.

DJ: Isn't there a danger that the cure sometimes perpetuates the problem, or sometimes makes it worse in some way or creates a new problem? I'm thinking of the Great Depression.

EH: Danger? It's an inevitability that the cure will produce a new problem.

DJ: The cure is often the product of a moral view. It is to satisfy a sense of moral indignation that punitive measures are adopted which then have unforeseen consequences.

SB: The punitive measures are restrictions on certain kinds of city dealings, or the separation of investment banking from deposit banking.

Now these are questions for technicians. I think there is, if not a moral sense, another sense in which the cures produce the next crisis. Supposing Keynes could persuade us that government deficits are not such a bad thing after all, and that we should build cathedrals to employ otherwise unemployed workers, the danger is that this view carries on when we're back to the more normal problem, which is scarcity. And if we say government deficits don't matter or they don't matter very much up to a certain point, then there is a danger that once the crises like the present one are overcome and we're back with more normal problems, government will spend too much and tax too little and we'll have the next crisis, which will be one of inflation. So there is a sense in which the fashions or fads or genuine remedies for one set of problems carry on into the next one, and this I think is far more important than whether financial regulation goes too far or not far enough.