"The fog of war" is a term generally attributed to Robert McNamara, President Kennedy’s secretary of defense during the Vietnam era. At times, the discussion about the global financial crisis (or GFC) seems lost in a similar miasma of confusion.

The GFC is really a "Minsky moment." In Stabilizing an Unstable Economy (1986), Hyman Minsky outlined a hypothesis that excessive risk taking, driven in part by stability, lead to market breakdowns -- that stability is itself destablizing.

The current crisis is financial, economic, social and increasingly ideological. Nikolas Sarkozy, president of France, has pronounced the death of laissez faire capitalism: "C’est fini."  World leaders have penned fevered attacks on neo-liberalism. Even religious leaders have spoken out.

Criticisms of the ancien regime are substantive and deserved. Undoubtedly, there have been egregious market failures, management excesses, and errors in the lead-up to the GFC. But the key lessons of the crisis may be subtler than were first evident.

Growth has been driven by cheap and abundant debt, un-costed carbon emissions, and other forms of pollution. Governments, irrespective of political persuasion, benefited from the favorable economic environment. The ability of governments and central banks to control and fine-tune the economy with a judicial mixture of monetary and fiscal policy became an article of accepted faith. The reality is that this period of growth may be coming to an end.

All brands of politics and economics have been informed by assumptions about the sustainability of high levels of economic growth and the belief that governments and central bankers can exert a substantial degree of control over the economy. The debate between "opposite" ideologies misses the point that it may not be feasible to re-attain the growth levels in the global economy of the last 20 or so years .

Ponzi Prosperity

P.J. O’Rourke, writing in Eat The Rich (1998), observed that: "Economics is an entire scientific discipline of not knowing what you’re talking about." In reality, growth was founded on a series of elegant Ponzi schemes.

Consumption, rather than investment, drove growth, particularly in the developed world. Debt-fueled consumption became the norm. In the new economy, there were three kinds of people -- the haves, the have-nots, and the have-not-paid-for-what-they-haves.

"Financial engineering" replaced real engineering in many countries. Entire cities (London and New York) and economies (Iceland) became dominated by the rapidly growing financial services industry. In the US, financial services’ share of total corporate profits increased from 10% in the early 1980s to 40% in 2007. The stock market value of financial services firms increased from 6% in the early 1980s to 23% in 2007.