Overview and Summary of Part 2

To a considerable extent the financial system has reverted to a mixture of the system of the 1920s and a new system where there is massive government intrusion into capital markets. The consequences of this intrusion are poorly understood and difficult to analyze. For example, what happens when the FNMA or some Federal Home Loan Banks get into difficulty? A vast and rapidly expanding set of and variety of derivative and synthetic derivative assets exist with a notional value in excess of $400 trillion at the end of 2006. The transition to the new system has been fumbling and costly, in part because of a lack of transparency. Transparency will improve and innovations will continue, but large costs in present value terms are also likely to continue to be absorbed by unwitting investors. Depositors and borrowers at commercial banks can anticipate receiving a new and different set of services, which in some respects are better and in others worse than they received eighty years ago.