Reining In Bubbles So They Won’t Pop
Our financial system accelerates the human instinct to go wild during good times. Perhaps we need some automatic brakes.
By Daniel Gross
When financial historians look back at the last six months, they’ll be hard-pressed to explain precisely why our advanced financial system suffered such a catastrophic failure. So many of the developments—a $1.2 trillion subprime-mortgage market, a $62 trillion unregulated, nontransparent credit-default-swap market, $50 billion private-equity buyouts of cyclical companies, hedge funds going public—seem, on their face, to be irrational, silly nonstarters. And yet the players pulling off these deals were lionized as geniuses, as transformational business figures. They were the Smart Money. They turned out to be the Dumb Money. How did the crown jewel of American capitalism—our financial-services industry—transform into cubic zirconia? How did a nation shift seamlessly from the dotcom bubble into a more-inclusive housing and credit bubble? And, most important, how can we stop it from happening again?
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