3I. PreambleThe bankruptcy of Lehman Brothers in September 2008 precipitated what, inretrospect, is likely to be judged the most virulent global financial crisis ever. To be sure,the contraction in economic activity that followed in its wake has fallen far short of thedepression of the 1930s. But the virtual withdrawal, on so global a scale, of private shortterm credit, the leading edge of financial crisis, is not readily evident in our financialhistory. The collapse of private counterparty credit surveillance, fine tuned over so manydecades, along with the failure of the global regulatory system calls for the thoroughreview by governments now under way.The central theme of this paper is that in the years leading up to the current crisis,financial intermediation tried to function on too thin a layer of capital, owing to amisreading of the degree of risk embedded in ever-more complex financial products andmarkets.In sections II through V, this paper reviews the causes of the crisis. In sections VIto VIII, the nature of financial intermediation is probed; in sections IX to XV, a set of reforms that I hope address the shortcomings of the existing regulatory structure; insections XVI and XVII, the role of monetary policy in the current crisis is examined; andsection XVIII, the conclusion.II. 1. The Arbitraged Global Bond Market and the Housing CrisisIt was the global proliferation of securitized, toxic U.S. subprime mortgages thatwas the immediate trigger of the current crisis. But the roots of the crisis reach back, as best I can judge, to the aftermath of the Cold War.