1 Introduction

Consider a household which plans to buy a home, a firm that plans to

build a new plant, or a government that plans to improve highways. If
their income is insufficient to finance the projects these households, firms,
and governments are called deficit units. On the other side of the ledger
there are surplus units, households, firms and governments with incomes
greater than their expenditures and which want to increase their income
further by investing their savings. The role of the financial system is to
facilitate transactions between these two types of units. In fi nancial
markets the deficit units bid for the excess funds of the surplus units by
selling instruments of debt (e.g. short-term commercial paper, IOUs,
bonds) or ownership (shares) to raise funds to carry out planned expendi-
tures (Figure 1.1). These instruments entitle the surplus units to returns or
income streams in the form of interest payments or dividends to be
received at future dates. But financing is not always direct; the surplus
units do not always meet the deficits units “face to face” as direct buyers
of financial instruments. The financial system also includes intermediary
institutions such as banks, credit unions, pension funds, insurance com-
panies, hedge funds, and mutual funds, which facilitate financial transac-
tions. As shown in Figure 1.2, these financial intermediaries stand between
the surplus and deficit units and serve as hubs that gather savings of the
surplus units and market them to the deficit units. They also collect the
returns and distribute them among the surplus units after deducting the
fees for their services.
If everything goes well and mutually beneficial exchanges take place,
both sides of the trade improve their well-being. On the deficit-unit side
households enjoy their new homes, firms expand their capacity and raise
profits, and the governments provide new highways that save time and
reduce traffic hazards. The surplus units receive returns and add to their
wealth.
There is, of course, always the possibility that the actual outcomes
may be different from the plans. There are always risks associated with
forward-looking actions. The homebuyer may be unable to make mortgage
payments and face foreclosure. A recession may force a firm to abandon
2 Introduction

Returns

Surplus Deficit
Units Units

Funds

Households, Households,
firms, and firms, and
governments governments in
with savings need of funds

Figure 1.1 Direct financing.

Returns Returns

Surplus Financial Deficit

Units Intermediaries Units

Funds Funds

Households, Banks, credit Households,

firms, and unions, thrifts, firms, and
governments with mutual funds, governments in
savings hedge funds, need of funds
pension funds,
and insurance
companies

Figure 1.2 Financial intermediation.

its new plant and face bankruptcy. The surplus units may not be able to
collect the expected payments. The fact that the future is unknown is
what really makes financial markets shine. They price the risk and match
borrowers who pursue high-risk projects with portfolio holders who can
tolerate more risk in return for higher interest or dividends. They offer
means to manage risk in forms of portfolio diversification and trading
instruments of insurance. Finally, they make risk more affordable by dis-
tributing it among many wealth holders. Thus, financial markets are mar-
kets in which economic agents raise funds, invest in assets, and manage
risk by trading instruments such as short- and long-term loans, stocks,
and derivative contracts.
From a social perspective, finance lubricates the channels of commerce
and production. Merchants need lines of credit because buying and selling
 Introduction 3
are usually temporally separated. Producers rely on credit to pay their
daily production costs. Allocation of surplus funds among the deficit units
creates new industries, products, and neighborhoods. The construction
of merchant fleets and the emergence of long-distance trading compa-
nies that globalized the economy in the seventeenth and the eighteenth
centuries required large numbers of investors both to amass sufficient
funds and to distribute risk among many stakeholders. At the dawn of the
industrial revolution large-scale projects such as canals and railways
required the mobilization of savings across the economy through loans
and common stocks. Not surprisingly, many economists today fervently
advocate the development and growth of financial markets across the
globe with the expectation that they will be the handmaidens of economic
growth.
However, the enthusiasm about the beneficence of the financial system
is hardly universal. Skeptics point out that the laudatory accounts of text-
book descriptions of the financial system overlook its unappealing fea-
tures. Certain financial innovations are merely bets against future market
movements, and, as such, move money around without creating much
social value. Financial markets may not function efficiently due to vari-
ous kinds of frictions and imperfections, such as differential access to
information, perverse incentives, and price manipulation. The troubles of
a few institutions may spread to the rest of the system quickly due to
financial institutions’ interdependence, especially during periods of
heightened risk and excessive debt creation. The outcomes of this conta-
gion are often a generalized run on banks, pervasive defaults, and stock-
market crashes. Even worse, these crashes may spill over to the real sector
(industry, commerce, agriculture, services) and trigger a generalized eco-
nomic contraction. Boom-and-bust cycles throughout financial history
are the primary evidence offered in support of this view. These observa-
tions are usually coupled with the recommendation that it is necessary to
impose rules and regulations on financial institutions by public authori-
ties to alleviate excessive speculative activity and reduce the likelihood
of crises.

The “vision” thing

Financial crises have been a recurrent feature of the capitalist economy.
The earlier classic episodes are the Dutch tulip mania, the Mississippi
Bubble, and the South Sea Bubble that took place in the seventeenth and
eighteenth centuries. Throughout the nineteenth century speculation in
land and railways, stock-market booms and busts, and subsequent peri-
ods of stagnation were rampant in Britain and the US. The crash of 1929
is still recognized as the ultimate financial meltdown, and the launch-
ing pad of the Great Depression. After a lull that lasted until the 1980s
financial crises came back with a vengeance. In the US savings and loan
4 Introduction
institutions failed in the 1980s at the cost of hundreds of billions of dollars
to the taxpayers. 1987 witnessed the biggest one-day Wall Street crash.
The hedge fund Long-Term Capital Management was saved by a consor-
tium of investment banks and the Federal Reserve System in 1998. The
dot-com bubble burst in 2000. Finally, the subprime-mortgage crisis of
2007–8 triggered fears of another Great Depression. However, there is still
no consensus among economists on whether these events were ordinary
responses of the markets to exogenous shocks or symptoms of endemic
market failures.
One might think that experts, with the benefit of historical hindsight,
must have by now determined the sources of financial instability, learned
to anticipate the tell-tale signs of looming problems, and designed meas-
ures to avert a crisis. This is not the case. A common response among the
commentators in the face of widespread defaults, bank failures, and asset-
price crashes is surprise. After the near meltdown of the financial system
in 2008 US Vice-President Cheney, in an Associated Press interview in
January 2009, stated, “I wouldn’t have predicted that. . . I don’t think any-
body saw it coming.” President George W. Bush wrote in his memoirs that
he was “blindsided” by the crisis. The president and the vice-president
may be excused for their inadequate forecasting abilities due to the numer-
ous issues that demanded their attention daily, from wars in Iraq and
Afghanistan to security leaks in the administration—and they were not
specialists in financial turmoil. It is the job of experts in academia, busi-
ness, and government to take note of the potholes and hazardous condi-
tions in the economy, inform the public and the policymakers, issue
warnings, and make recommendations.
But they also failed—collectively. Throughout the decades preceding
the crisis most of the experts hailed the incessant rise in home prices,
securitization of debt instruments, and the proliferation of opaque finan-
cial derivatives as beneficial forces that created an age of unprecedented
prosperity and demonstrated the omnipotence of the “free market sys-
tem” (a euphemism for capitalism unfettered by government regulations).
They ignored or downplayed how these new markets and instruments
increased the fragility of the financial system and elevated the risk expo-
sure of the entire financial system and the economy. The dominant con-
ceptual framework propounded by economists and promoted, among
others, by Alan Greenspan and Ben Bernanke (successive chairs of the
Federal Reserve System), bank executives, and real-estate-industry insid-
ers was that innovations in financial markets stimulated the flow of
savings to securities and reduced risk across the system. These savings
ostensibly enabled technological revolutions, enhanced productivity, and
improved the global standard of living. Potential problems, such as the
subprime-mortgage defaults, were thought to be isolated in remote cor-
ners of the financial world, unlikely to spill over to the rest of the system.
 Introduction 5
The media held the party line by constantly talking up the riches to be
attained in the financial markets.
What these economists, policymakers, business people, regulators, and
much of the public shared was a particular “vision” or frame of mind that
shaped how they observed and conceptualized the developments in the
economy. Economist Joseph Schumpeter drew attention to the role of this
frame of reference in economic analysis:

[I]n order to be able to posit ourselves any problems at all, we should

first have to visualize a distinct set of coherent phenomena as a worth-
while object of our analytical efforts. In other words, analytical effort
is of necessity preceded by a preanalytic cognitive act that supplies
the raw material for the analytic effort. In this book this preanalytic
cognitive act will be called Vision.
(1954: 41)

Schumpeter’s preanalytic vision is the researcher’s perception of the “world

in which we live” that selects certain facts as important or relevant and
ignores others. It precedes the analytical work of constructing theoretical
models to conceptualize the vision. The preanalytic vision is obviously
closely related with ideology.

In fact, [ideology] enters on the very ground floor, into the preanalytic
cognitive act of which we have been speaking. Analytic work begins
with material provided by our vision of things, and this vision is ideo-
logical almost by definition. It embodies the picture of things as we
see them, and wherever there is any possible motive for wishing to
see them in a given rather than another light, the way in which we see
things can hardly be distinguished from the way in which we wish to
see them.
(Schumpeter 1954: 42)

The important point here is that ideology is an essential ingredient of the

preanalytic vision and an indispensable component of the endeavor to
make sense of the world.1 As such, it may restrict the researcher to think-
ing in limited structures, and fail to discern contrarian trends and to ask
appropriate questions. In light of Schumpeter’s comments, ideological
proclivities explain the failure of a large majority of the experts to see the
oncoming subprime meltdown. The dominant vision in the post-1980
period precluded systemic financial fragility and crisis. Most experts,
despite the benefit of historical hindsight, failed to anticipate the telltale
signs of looming problems because, within their frame of reference, unfet-
tered markets were inherently stable, and innovations only further
improved the resilience and stability of the financial system.
6 Introduction
Alan Greenspan made the same point at a post-2008 congressional hear-
ing: “An ideology is, is a conceptual framework with the way people deal
with reality. Everyone has one. You have to—to exist, you need an ideol-
ogy.”2 He further announced that the subprime crisis revealed an error in
his ideology: “I found a flaw in the model that I perceived as the critical
functioning structure that defines how the world works.” During the
same hearing, he explained:

I made a mistake in presuming that the self-interests of organizations,

specifically banks and others were such that they were best capable of
protecting their own shareholders and equity in firms . . . So the prob-
lem here is something which looked to be a very solid edifice and,
indeed, a critical pillar to market competition and free markets, did
break down. . . [T]hat shocked me. I still do not understand why it
happened and, obviously, to the extent that I figure out what hap-
pened and why, I will change my views.

What happens when events that are deemed anomalous from the
perspective of the dominant “vision” occur? Various outcomes are pos-
sible, depending on the frequency, significance, and severity of such
occurrences. Sometimes the anomalies are ignored or dismissed by the
public, investors, and experts. Believers in the magic of the markets
adhere to the “once in a lifetime” cliché and relegate crashes to mere
aberrations. After passing through stages of blame and atonement inves-
tors pick up the pieces and proceed to the next speculative boom, sharing
the sentiment expressed by the “four most dangerous words” in invest-
ing attributed to Sir John Templeton: “This time it’s different.” Academics
who side with the dominant orthodoxy of the supremacy of unfettered
markets offer versions or interpretations of events to align them with
their framework.
However, conceptual complacency is not universal. Crises, especially
when they are severe and long-lasting, may lead to alternative visions of
how the economy works and theoretical fault lines. Market turbulences, in
fact, motivated many economists to design models to explain the condi-
tions under which financial markets fail to function efficiently and apply
these theories to episodes of boom and crash. While these economists
imply that financial markets do not guarantee socially optimal outcomes,
there is substantial variation among the visions of these alternative mod-
els. One set of models focuses on consequences of the imperfectly com-
petitive market structures. Another set emphasizes the decision-making
process of investors. Others go further by positing a vision of capitalist
dynamics as inherently unstable and fragile rather than harmonious,
balanced, and steady.
As for this book, it acknowledges a plurality of explanations (although
it does not subscribe to the relativist view that all theories are valid on
 Introduction 7
their own terms and that there is no discoverable, objective truth). Its
objective is to lay out the preanalytics and analytics of competing expla-
nations of financial crises, illustrate them in historical perspective, and
present the current state of the debate in the economics discipline. It is
important to appreciate the differences between alternative approaches
and their implications because, as current discussions over the regulation
of financial markets attest, theories inform the public policies that influ-
ence people’s everyday lives.

Types of financial crises and the scope of the book

A financial crisis occurs when a large number of wealth holders attempt
to liquidate their assets simultaneously due to the fear that the value of
their holdings will depreciate. Three types of asset may underlie three
types of crisis: bank deposits (or other short-term loans to banks), securi-
ties (government debt, private bonds, and stocks), and currencies. When
banknote holders, depositors, and other short-term lenders grow uneasy
about a bank’s solvency they rush to redeem their loans to banks. Concerns
about depreciation of the value of securities force their owners to sell their
portfolios. The expectation that a national currency will lose value vis-à-vis
other currencies leads to a run from the currency.
Once agents’ apprehension is kindled and spreads, the crisis can easily
become a self-fulfilling prophecy and turn into a bank run, bond- or stock-
market crash, or a currency collapse. In each of these instances owners of
these assets try to convert their wealth to safe alternatives, which may
take the form of gold, cash, Treasury bills, and so forth, depending on
time and geography. What is common to all financial crises is that, when
many wealth holders try to dump these assets simultaneously, buyers
disappear and liquidity evaporates. The positive-feedback mechanism
between expectations of declining values and excess supply of assets in
the market exacerbates the price collapse. Increasing risks of default and
bankruptcy of the deficit units make lenders less willing to make loans
and a credit freeze sets in, with potentially disastrous consequences for
the entire economy.
The scope of the book is limited to banking and private security-market
crises. The reason for the narrow boundaries is pragmatic. The primary
question is how well financial markets function in allocating of savings
and disseminating information. Crises that emerge in the private sector of
the economy offer a more appropriate focus to address these questions.
Government-debt crises open up the stage for an entirely different set of
questions related to fiscal policy and deficits, which lie outside the scope
of this work. Consideration of currency crises, such as the 1994 Mexican
peso and 1997 Thai baht crises, in turn, requires development of ideas
about balance of payments and exchange rates. An adequate treatment of
these additional topics is unfeasible in a one-semester course model, for
8 Introduction
which this book is designed. Therefore, the subject of currency crises is
left outside the scope of the book.

Plan of the book

This book presents, in chronological order, a series of financial booms
and busts, their primary actors, relevant institutions, mechanics of
expansion and crash, and consequences. Chapters 2, 3, and 4 present
accounts of the three classic financial crises: the Dutch tulip mania of
1636–7, the Mississippi Bubble of 1719–20, and the South Sea Bubble of
1720. Tulip mania has always captured the imagination of the commenta-
tors: imagine paying several years’ income for a single tulip bulb. Rare
tulip bulbs were traded among aficionados for very large sums through-
out the 1620s and 1630s in the United Provinces. However, the emphasis
here is not the incredulous stories about the purchase of luxury items by
the collectors; the more interesting part of the story for the present
purpose relates to the transferable forward contracts that were traded
among a relatively new class of traders for speculative purposes. Tulip
mania refers to the twentyfold increase in and sudden crash of the
average price of bulb forward contracts between November 1636 and
February 1637.
The Mississippi and South Sea bubbles took place almost simultane-
ously in Paris and London respectively. Both were initiated by private
companies to restructure government debt held by the public. The strat-
egy in both cases was to create a publicly held commercial company and
swap shares of the company with the outstanding government debt.
To motivate bondholders to swap the debt they held for company shares
the Mississippi and South Sea companies promised potential sharehold-
ers high profits from the commercial activities of the companies and
devised means to raise expectations of share-price appreciation. Rapidly
rising share prices attracted more investors in anticipation of capital
gains. The value of the Mississippi shares increased from 500 to close to
10,000 livres between May and December 1719, and toppled in May 1720.
The share price of the South Sea Company rose from £100 to £900 in the
first six months of 1720 but collapsed back to its original level in
September of the same year. Chapters 3 and 4 detail the mechanics of the
creation of the two companies, their internal contradictions, and their
eventual collapses.
In addition to chronicling these events, in Chapters 2, 3, and 4, I intro-
duce several economic concepts and institutions that are pivotal to under-
standing financial markets. In the context of tulip mania, for instance,
I present spot and forward markets, hedging, and short selling. Chapter 3
starts by presenting a discussion of money and credit, how the banking
system creates money through credit extension, and insolvency and
illiquidity crises.
 Introduction 9
In these three chapters I describe what happened and how, but do not
probe the question of why prices behaved the way they did or explain
the willingness of the investors to pay astounding prices for the assets.
Simply saying that they were seeking capital gains is not an explanation
because it begs the question of why investors did not anticipate that prices
were apt to collapse and ignored the heightened risk of loss of wealth.
What is missing in these chapters is the theory. Asset-price bubbles are
defined as persistent and cumulative deviations of the market price from
the fundamental or intrinsic price. To make sense of this definition it is
necessary to lay out the meaning of the fundamental price. Chapter 5 pre-
sents the standard theory of price determination that links prices to “fun-
damental” factors via the “rational” decision-making of economic agents.
The first part of Chapter 5 reviews the standard-fare economic analysis
that covers utility and profit maximization, supply, demand, and price
determination in the commodities markets. Next, it shows how bond and
stock prices are related to fundamentals that are summarized by the dis-
counted expected income streams of these securities.
The second part of Chapter 5 delves into the six issues that are central to
the theories of asset-price bubbles and banking crises. As all investment
decisions are future-oriented and no one has perfect foresight, the first
issue concerns how to operationalize uncertainty in modeling forward-
looking decision-making. The second is the discussion of the rational-
expectations hypothesis that has become the workhorse of modern
mainstream economic models. Third, I introduce the idea of the “rational
bubble” or the theoretical possibility of an asset-price bubble when agents
form expectations “rationally.” The fourth topic is the meaning of
“rational” behavior in the context of standard economic analysis. While
the rest of the world uses the word “rational” synonymously with “rea-
sonable,” economists define the term narrowly as optimizing behavior.
Fifth, I present challenges to the idea of rationality-as-optimization from
within the economics discipline. The final issue is the debate over whether
speculation stabilizes or destabilizes asset prices. These discussions lay
the groundwork to appreciate competing crisis theories, which are pre-
sented in Chapter 6.
In Chapter 6 I identify five competing approaches to explain financial
booms and busts and illustrate these competing hypotheses in the context
of the three classical bubbles. These approaches are distinguished in
terms of their takes on how economics agents make financial decisions
and the economic environment in which they are located. According to
the first approach, which also serves as the reference category, asset prices
are outcomes of optimizing decisions of economic agents in perfectly
competitive markets. This position implies that asset prices fully reflect
the available information on market fundamentals, and theoretically rules
out the possibility of bubbles. The second approach contends that asset-
price bubbles may occur and attributes them to distortions created by
10 Introduction
government interference in markets. The third approach retains the
optimization assumption, but argues that markets are not perfectly com-
petitive. Endemic imperfections and frictions make financial markets
prone to crises. The fourth approach follows the work of the behavioralist
economists, who object to the optimizing decision-making assumption.
They trace the sources of financial crises to investors’ reliance on rules
of thumb and the interdependence of investment decisions. The fifth
approach follows the work of three economists, Bagehot, Minsky, and
Kindleberger, who view financial booms and busts as consequences of the
internal dynamics of the credit cycle of the capitalist system.
Chapter 7 returns to the historical record. This chapter considers the
banking and stock-market crisis in Britain during the first half of the nine-
teenth century. There are three important themes in this chapter. The first
is the consequences of a technological revolution, i.e. railways, on the
development of financial markets, speculation, stock-price appreciation,
and collapse. The second theme is the banking system’s connection with
this process, or, specifically, the relationship between bank credit exten-
sion and stock-price movements. The third theme is the conflicting private
and public roles of the Bank of England and the need for a lender of last
resort to save the banking system from collapsing when credit channels
are blocked.
The subjects of Chapters 8 and 9 are the arc of the US banking system,
from its first experiment with central banking in 1791 to the establish-
ment of the Federal Reserve System in 1913, and the recurrent boom-and-
bust cycles in land and railroads. The widely varied US banking
experience, including free banking, state monopolies, outright prohibi-
tion, and the hierarchical national banking system, offers a wealth of
information on how policymakers and banks, in the absence of a central
overseer of the system, searched for ways to stabilize the banking system,
and the successes and failures of this endeavor. The fortunes of asset
markets were closely intertwined with the banking system. The first half
of the nineteenth century witnessed bouts of land speculation fed by
bank credit; in the second half of the century railroads were the leading
sector of the economy, as well as the primary source of growth and haz-
ard in the financial markets. It was a very turbulent century, with finan-
cial crises in almost every decade. In Chapters 8 and 9 I select six of these
episodes to tell the story of the American experience: the land panics of
1819 and 1837, the land and railroad securities panic of 1857, the railroad
securities panics of 1873, the currency and industrial panic of 1893, and,
jumping into the new century, the run on New York City financial-trust
companies in 1907.
Chapter 10 is devoted to the Wall Street Crash of 1929, which illustrates
various themes that run through the book, including the mechanisms
behind the boom and fragility in securities markets, the dilemmas of
Federal Reserve policymakers regarding stock-price overvaluation, and
 Introduction 11
the enthusiasm of academics and stakeholders in cheering on and talking
up the bubble economy. This chapter summarizes the debate over the
sources of stock-market growth in the 1920s and the subsequent crash,
which remain contentious to the present day. In addition it discusses in
more detail the relationship between the financial crash and the depres-
sion in the real economy.
Chapters 11 and 12 dig deeper into the theoretical issues raised in
Chapters 5 and 6 and explore the question of the significance of the equality
of the market price and the fundamental price. Why does it matter? The
answer is related to the welfare implications of deviations of price from its
intrinsic value. Some light on this question is already shed in the histori-
cal chapters, where sustained deviations from the fundamental price were
shown to have resulted in undesirable resource allocation.
Chapter 11 tackles the question of how resources are allocated via
market prices and the efficiency properties of market outcomes. The
chapter starts with a detour into the intellectual history of moral phi-
losophers, Adam Smith’s “invisible hand,” and reinterpretation of this con-
cept by current standard-fare economics. It then presents two defenses
of unfettered markets: the allocative- and informational-efficiency
defenses. The chapter concludes with a discussion of why the price
system may fail to bring about efficient outcomes due to imperfections
and frictions endemic to markets, or interdependent actions of economic
agents.
In Chapter 12 I discuss the allocative- and informational-efficiency
arguments with reference to financial markets. It will be noted immedi-
ately that the debates over market efficiencies are already familiar from
the theoretical taxonomy of Chapter 6. The fundamentals-based and pol-
icy-based distortions approaches uphold the view that, left to their own
devices, markets attain efficient outcomes. The other three approaches are
skeptical that this is always the case. Chapter 12 summarizes the theoreti-
cal arguments of the two opposing sides on the social-welfare implica-
tions of financial markets. It also presents the efficient-market hypothesis
and the arguments of its critics. These debates are important from the
public-policy perspective because the failure of allocative or informa-
tional efficiency inevitably leads to the question of the need for market
regulation. The discussion of these questions also sets the stage in Chapter 12
for post-1980 debates.
Chapters 13, 14, 15, and 16 recount three acts of a play. The banking
regime put into place in the 1930s produced an extended phase of boring
but stable financial relations that lasted until the 1970s. In the 1980s and
1990s, however, many of the financial regulations of the 1930s were dis-
mantled or unenforced for being out of date, unnecessary, and harmful.
Deregulation widened the realms of financial institutions’ operations.
The immense growth of derivatives trading (securitized debt instru-
ments, options, and swaps) was perceived as a force that deepened and
12 Introduction
stabilized markets. The financial sector more than doubled its share
in the economy. However, these decades also brought back market
turbulence.
Chapter 13 focuses on the developments in financial markets in the
1980s, i.e. leveraged buyouts, junk bonds, the savings and loan crisis, and
the stock-market crash of 1987. Chapter 14 discusses the growth of securiti-
zation of mortgage debt and swap derivatives and also describes two
financial calamities of the decade: the implosion of the hedge fund Long-
Term Capital Management and the dot-com boom and bust. Chapters 15
and 16 cover the latest installment in the narrative, the subprime-mortgage
crisis of 2007–8. The narrative of these four chapters underscores that the
last and the most momentous act since 1929 was not happenstance or
a freak accident but the outcome of forces that had been building in the
economy since the 1980s.
One side effect of the subprime-mortgage crisis has been soul searching
within the economics profession. The fact that economists largely failed to
anticipate the financial meltdown led many leading economists to ques-
tion whether the way they learn, teach, and practice economics is also in
crisis. Criticisms of the dominant theoretical paradigm included its exces-
sive reliance on an axiomatic approach based on optimizing economic
agents, on building models that are formally pleasing and elegant but have
little relevance to the “real world,” on an intentional dismissal of history,
and on wearing the ideological blinds of free-market efficiency. In the
public-policy sphere the ongoing parallel discussion is whether the sweep-
ing deregulation of the previous decades should be reversed and private
financial institutions’ wings clipped to avoid excessive risk-taking in the
future. The concluding chapter takes stock of the legacy of the 2007–8 crisis
for the economics discipline and the restructuring of financial architecture.

Key terms and concepts

Deficit unit
Financial intermediaries
Financial market
Financial system
Preanalytic vision
Real sector
Surplus unit

Endnotes
1 Schumpeter (1954) recognized the dangers of ideological bias and wrote at
length on how scientific procedural rules would alleviate ideological errors if
not eradicate them totally.
2 Greenspan quotations are from Cassidy (2009: 205–6).
 Introduction 13
References
Cassidy, John. 2009. How Markets Fail: The Logic of Economic Calamities. New York:
Farrar, Straus and Giroux.
Schumpeter, Joseph A. 1954. History of Economic Analysis. New York: Oxford
University Press.