When bubbles explode, banks fail.
What made the Great Depression great [was that an economic downturn was] allowed to disrupt the operation of financial intermediaries. . . . [I]t is . . . the instability of banking systems that distinguishes economic crises from ordinary recessions. . . .
—Eichengreen and Arteta2
The financial sector is the economy’s plumbing system. A company’s failure . . . is like a broken sink, but a failure in the financial sector threatens the entire water supply.
The financial world is confronted almost permanently with financial crises prompted by numerous causes, some of them acting in concert, and it is nearly impossible to catalogue them in a satisfactory way. Take your pick. Banking crises masquerade as sovereign crises; foreign currency problems generate banking, financial, and twin crises; while economic or policy crises spark sovereign crises.
Worse yet, there is always a lack of consensus on the causes of crises, let alone—when there is an agreement on the source of the crisis—on where on a spectrum of relevance the identified causes produce their effects.
Aristotle taught us that four causes can bring a natural effect or event. The material cause explains the effect on the basis of what material the effect is made of. The efficient cause pertains to the way the material is processed to create the effect. The formal cause ...