Every politician, central bank, and regulator in the developed world spent 2008 and 2009 saying, “This must never happen again.” “This” was the financial meltdown that almost took down the world economy. They differed in their proposed solutions but held one demand in common: Banks must never again take the kind of highly leveraged risks in exotic securities that were widespread at the tail end of the housing bubble. Financial institutions should instead build a large buffer of risk-free investments that will always be liquid and never result in losses.
The favored buffer: government bonds. The economic consensus after the financial collapse was that banks should lend more money to governments. Politicians and regulators demanded it, twisted arms, and wrote new rules to make it happen. How did it work out? As Johan Norberg explains, today the entire European banking system is on the verge of collapse.