The 2008 crash was more than the start of a recession; it represented the end of what economists James Stock and Mark Watson labeled the "Great Moderation," a two-decade period of low business cycle volatility, moderate inflation, moderate unemployment, and steady industrial production. The Great Moderation lulled businesses into reducing their reserves and led some economists to speculate that perhaps we had moved beyond business cycles entirely. As Nobel laureate Robert Lucas proclaimed at the 2003 American Economic Association meeting, the "central problem of depression prevention has been solved, for all practical purposes."
The crash silenced all triumphalism. The Great Moderation is now a fading memory, but the shape of the new economic order remains in doubt. A depression seems unlikely, and a return to robust global growth unlikelier still, though one can find advocates for positions everywhere along the continuum from collapse to boom.
Uncertainty is the signature of this moment, and it hints at the shape of the new normal. We have entered the "Great Turbulence," a period of high amplitudes, rapid oscillations, and scarce equilibrium. Short-cycle events will punctuate the landscape, events like May 2010's "flash crash," when the Dow Jones industrial average plunged -- and rebounded -- nearly 1,000 points within a few minutes. Once upon a time, it took months or years to recover from a crash; now, both plunge and rebound can unfold in nanoseconds.
The Great Moderation was no accident; it was the consequence of the financial institution-building that began at Bretton Woods in 1944. Determined to avoid the devastating economic shocks of the interwar period, a generation of leaders designed a framework of strong institutions, including the International Monetary Fund and World Bank, that could intervene when market forces alone could not maintain equilibrium. It was not without controversy, but the system seemed to work, damping unpredictable economic swings. The result: the Great Moderation, a period of sunny economic weather punctuated by only the occasional storm.
Beneath the calm, though, the growing complexity of the global economy meant that over time, the magnitude and frequency of institutional interventions increased. John Maynard Keynes, the British economist whose ideas shaped the postwar economic order, himself never imagined that the powerful tools created in the Bretton Woods system would be used as frequently as they were, and by the early 1970s, more than a few economists began to wonder whether these measures were treating the symptoms of a problem and not its root cause. Perhaps the global economy was not an equilibrium system at all.
The technological revolution that began with the microprocessor accelerated this shift even as the Great Moderation was beginning. The digital technologies that hastened the fall of the Berlin Wall were also eating away at the power of the institutions in the Bretton Woods system. (Coincidentally, Tim Berners-Lee finished the original design of the World Wide Web within months of the wall's fall.)
The diffusion of the web and consequent dot-com revolution accelerated the velocity and volume of the global economic system to the point where the Bretton Woods institutions could not keep up. In a world awash in high-speed trading and hot money, traditional institutional interventions are woefully inadequate as dampening mechanisms. Just look at Europe today.