John Cassidy: Economics, when you strip away the guff and the mathematical sophistry, is largely about incentives. At any time, these can get distorted in a particular market. Usually, though, the memory of past crashes, together with financial regulations and restrictive social conventions, preserve a modicum of stability.
But during Alan Greenspan’s era in charge of the US Federal Reserve, lax monetary policy, deregulation and financial innovation shocked the economy out of its stable configuration, placing it on a “bubble path”.
Once the credit bubble got started, the men who ran the biggest financial institutions in America were determined to surf it, regardless of the risks involved. Because from where they sat, and given the financial incentives they faced, pursuing any other strategy would have been irrational. And when a Wall Street CEO levers up their firm’s equity capital 30 or 40 to one in search of extra profits, their actions can bring down the entire economy.