Editor's note.

• Author: Dorn, J.A.
• Position: Global finance - Editorial

The Cato Institute held its 27th Annual Monetary Conference--Restoring Global Financial Stability--on November 19, 2009. The articles in this issue of the Cato Journal, except those by James Buchanan, Deepak Lal, and Charles Calomiris, were first presented at that conference. Additional articles from the conference will appear in the next issue. (1) The Cato Institute gratefully acknowledges the generous support of Steve G. Stevanovich to the production of these two special issues of the Cato Journal.

The financial crisis, which began in the U.S. subprime mortgage market in 2007 and spread in 2008 to the global economy, raises a fundamental question: What is the role of government in creating financial harmony? There is little doubt that the financial crisis was due to policy errors as well as misjudgments in the private sector. Federal housing policy in conjunction with monetary and fiscal policy distorted the allocation of credit and helped fuel an asset bubble. Private lenders overleveraged and called on Washington for bailouts. In the end, both the federal government and the Federal Reserve expanded their size and scope. The articles in this volume shed light on the causes of the crisis, the proper balance between government and the market in bringing about financial stability, and the reforms needed to ensure that the too-big-to-fail problem does not destroy financial harmony in the future.

In the lead article, Nobel economist James Buchanan argues that the United States needs a monetary constitution to protect the long-run value of money. In a world of pure fiat money, there must be some transparent rule that limits the quantity of money in order to lend predictability to its value. Unless that rule is explicitly anchored in the basic law of the land, discretionary monetary policy and a fractional reserve banking system will lead to crises of confidence.

Zanny Minton Beddoes, economics editor for The Economist, warns that the financial crisis has tilted the balance between government and the market toward the former, and that the challenge will be to restore the proper balance and ensure that global distortions are corrected--including the underpricing of risk. The socialization of losses and the privatization of profits is a recipe for financial chaos, not harmony.

Deepak Lal, a noted development economist, points to numerous policy errors leading to the "Great Crash of 2008." Those who blame the crisis on "market failure" would do...