Financial Whirlpools

Chapter 2

As the Gears Turn

Policies, Practices, Markets, and Risk

The forces that hit financial markets in the U.S. in the summer of 2007 seemed like a force of nature, something akin to a hurricane, or an earthquake, something beyond human control.

Gorton¹

Have you ever used a penny-stamping machine? You put a penny in a slot and for 75¢ you can watch different-sized gears push one another around and around. Finally, your penny falls out the bottom, flattened and stamped with an insignia. If we could somehow view the U.S. economy prior to the crisis, we might see its mechanisms driving one another like gears in the penny machine. Its most significant gears were federal policies, mortgage lending practices, and the housing and financial markets, ...