we economists call the great moderation. macroeconomic conditions and prices were characterized by historically low volatility. it was commonly assumed that in such relative tranquility and with other favorable economic conditions any buildup of financial risks would not be a concern. many policymakers began to take macrofinancial stability for granted. they overlooked the accumulation of serious vulnerabilities in the financial system, both nationally and internationally. these vulnerabilities included the accumulation of excessive private sector debt ; inadequate monitoring and managing of banks ’ risks ; heavy reliance on very short - term debt funding ; and the increasing use of new and exotic financial instruments, traded mostly in what we refer to as the “ shadow banking ” system, that is, financial intermediation that takes place outside the traditional regulatory and supervisory framework. many of these financial instruments were exotic indeed — futures, options, elaborate combinations of puts and calls and asset - backed securities of every size and shape and stripe, most especially mortgage - backed securities. issuing and trading in these exotic instruments generated bonanzas, yet it seemed too many of even the most experienced financiers that these instruments could only be fathomed by triple phds in rocket science. bank owners and bank regulators oftentimes simply did not fully understand what these instruments were, how they were traded, and the jaw - dropping risks that were piling up for the system as a whole. on the regulatory side, dangerous vulnerabilities appeared as well : a lack of attention to systemic risks in the financial system, and an over - reliance on markets to self - discipline. in other words, complacency kicked in. one of the most important factors triggering the global financial crisis of 2008 was that in the previous years housing prices in the united states had stopped rising. in the absence of these many vulnerabilities, this might have had only minor consequences. but with these vulnerabilities, the u. s. and other major financial centers, now complexly interconnected through the “ shadow banking ” system, slid to the verge of collapse. the financial system was saved, but it was badly damaged. above all, trust in the regulators and in the system itself was damaged. policies cannot do what they are intended to do without adequate political support and that requires trust. trust that policymakers will not only make good policy but that, over time, they will remain vigilant, not complacent, and they will be flexible

recent decades have also seen the fall of the berlin wall and the breakup of the soviet union, bringing much of eastern europe into global economic networks. we have witnessed the spectacular rise of china as an economic superpower. most of the clothing most of us are wearing today is probably made in china. perhaps your shoes, your wallet, your watch, and your smartphone. that so many things would have been made in and imported from the peoples republic of china would have been unthinkable as late as the early 1980s, when i was in graduate school. from a global perspective, in this period of the pax americana we have seen a dramatic decline in extreme poverty. another trend in the post - war decades that is easy to miss, for we can always find flaws — certainly they have them — these multinational bretton woods institutions have played an important role in promoting better governance throughout the world by emphasizing the need to foster strong and legitimate institutions, to hold policymakers accountable, and to make the policymaking process more transparent. for example, one of the three main roles of the international monetary fund is surveillance of the economic, financial, fiscal, and external situations of its member countries. this is done periodically through peer review exercises, each one concluding with recommendations that it continues to monitor. this grand arc of the post - world war ii period, this pax americana, has also seen the astonishing growth of international trade. on the one hand, with greater trade consumers and workers have benefitted all over the world. i share the strongly held view that free trade among countries contributes to faster economic growth and greater aggregate well - being. however, it is evident that in any given country not all members of society benefit from freer trade. in an ideal world, through appropriate policymaking, there would be schemes of compensation so that everyone might be satisfied. but the honest truth is that there are no examples of a seamless compensation processes. therefore, we periodically hear the voices of those who have been left behind. as i said, once a policy has been formulated and implemented, over time, responsible policymakers must remain both vigilant and flexible. we must evaluate policies and, as needed, adjust them. the north american free trade agreement, or nafta, which includes canada, the united states, and mexico, and was signed in 1994, is a case in point. all three nations have enjoyed substantial gains as a result of nafta. it is more than a trade agreement ;