Like a contemporary “whodunit” with a global crime scene, the financial meltdown has left behind countless victims, and lots of pointing fingers. The reasons for the collapse are debated by this group of estimable economists, some of whom worry that without really understanding what happened, we are in for a repeat episode. Moderator William Wheaton starts the discussion by suggesting that the interconnected global system of financial markets may be inherently unmanageable and overly risky, due to its complexity. Andrew Lo sees both peril and promise in these markets. Securitization, the bundling and trading of debt assets, “effectively allows ordinary borrowers that typically had to go through banks to tap into the power of global capital markets.” But there are “unintended consequences: Technological innovations outstrip our ability to understand them.” Financial transactions in a world of 8 billion people can become too complex, leading to uncontrollable systemic risk and disaster, much the way small brushfires swiftly grow and consume millions of acres. Robert Merton does not believe the complexity of trading securities or derivatives is at issue, but rather, human management: “Get those people with antennas out of the financial system, and put in people with some common sense.” Financial institution overseers need a “much higher level of skill set and training,” says Merton. They don’t need to be “quants,” but require “intuition as to the risk characteristics of these instruments.” This means understanding that risk often changes in a “complex, nonlinear way.” The tools required by modern finance are there, and do work, he asserts, “and they’re explainable without some off the shelf, weird theory.” Bengt Holmstrom describes how most financial systems are structured around trust that adequate collateral exists in a product, even when “you have no clue what assets lie behind it.” So “opacity is the very typical characteristic of liquidity and banking has nev...