Causes of Financial Crises Past and Present: The Role of the This Time is Different Syndrome

In this note, we attempt to place the question of how we got to the global financial crisis that began as the US Subprime debacle in the summer of 2007 in the context of an international and historical comparative setting. It is of some poignancy that the “we” here refers to the wealthiest economies in the world which had, as late as 2006, been enjoying the benefits of the so-called “Great Moderation.” The “Great Moderation”, was a term used to describe (and extrapolate from) the drop in macroeconomic volatilty in the advanced economies since the late 1980s. As the business cycle had been “tamed”, financial crises of the severity and duration of what we are undergoing in the US and elsewhere in Europe were deemed improbable. At the time, a sovereign default in a eurozone country was inconceivable.