Can Finance Save the World?

CHAPTER 3

One Main Lesson: Trust Is Gone

The Revelations of an Unprecedented Financial Catastrophe

The economic decline of 2007–2011 resulted from a triple crisis, which compounded the effects of a more “traditional” excess debt crisis, and helps explain the unexpected force and extent of its damage.

A Crisis of Innovation Out of Control

Above all, this was a crisis of financial innovation. Rapid development of securitization, off–balance sheet refinancing vehicles, and the infinite pooling of the subprime mortgages all contributed to the uncontrolled chain reaction that almost killed the system. Carried away by the idea of the great economic progress that the system was supposed to enable, financiers had adapted a number of products without ...