From The Wall Street Journal.

The current interest-rate trough reflects several weaknesses in today's financial markets that also are undermining the broader economy, from the failure of monetary policy makers to recognize the impact of financial and structural changes on market behavior, to serious lapses by credit rating agencies, to the inability of the senior management of financial institutions to stay within reasonable risk parameters.

Which raises the question: Why are we so poor at managing our key economic institutions while at the same time so accomplished in medicine, engineering and telecommunications? Why can we land men on the moon with pinpoint accuracy, yet fail to steer our economy away from the rocks? Why do our computers work so well -- except when we use them to manage derivatives and hedge funds? The answer lies in methodology. In science and technology, we rely on the scientific method: experimental design with dependent and independent variables and with reproducible results.

Economists and financial experts like to fancy themselves as exact scientists as well. Back in the 1960s, when we landed on the moon, economists emulated the terminology of Space Age navigation. They spoke of "midcourse corrections" and of bringing in the economy for a "soft landing." Since then, quantification and modeling have only grown thicker in the economics profession, where econometricians and other "quants" employ complicated analytical techniques and mathematical formulas.

By the 1980s, many economists had embraced the theory of "rational expectations," which essentially held that markets were all knowing and infallible. All of this infused the profession with an aura of authority, authenticity and accuracy.

The computations were correct, but far too often the conclusions drawn from them were not. This is because the models rely on historical data but fail to take into account the profound impact of structural changes in our economy and in financial markets that have unfolded in the postwar decades.

These structural changes -- including securitization, globalization and the explosion of debt -- have altered financial behavior in ways that the econometric models miss. In the decades since World War II, they have liberated financial risk-taking, as markets learned to game the system beyond the parameters of quantitative models. That is a critical difference between now and the last time interest rates were comparably low six decades ago.

Let's hope that is about to change. A central goal of new financial legislation should be to rein in extreme financial behavior. To inject some restraint into the rampant securitization that contributed so much to the current crisis, loan originators should be made responsible for a portion of repackaged loans. Off balance sheet activities should be brought back onto the balance sheet. Credit derivatives should be limited to a small proportion above the outstanding credit obligations. Financial conglomerates, which by their sprawling scale and scope are vulnerable to conflicts of interests, should be given special scrutiny by regulators.

Bang on.

The global financial system needs a serious re-think.  How it will look in a decade will be fascinating.  Hopefully, it will look dramatically different than today.