Abstract

Popular narratives blame bankers and other contemporary business elites for the Great Recession of 2007 for knowingly taking unsound risks or for corrupt insider trading, or financially illiterate consumers of loans and mortgages who took unwisely large debt and defaulted. This article argues that reality is far more complex and is a combination of unregulated systems of incentives and rewards for risky behaviors, conflicts of interests in rating and regulatory institutions, and collective folly across the spectrum of players, from the bankers to the consumers. This volatile combination led to a positive feedback, a bubble, of greater and riskier investments in complex deals and processes based on poorly understood or faulty mathematical models, resulting in the collapse of the system.

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