The Crisis: 2007 to 2008

The bear-market dynamic set in motion by the fall in prices beginning in 2007 exhibited the same destabilizing behavior as the bull-market dynamic of the euphoric phase. The panic and its aftermath demonstrated once again that, when it comes to liquidity, there is no such thing as a self-regulating market. In explaining how euphoria gave way to panic, particular emphasis is laid on the perverse effects of financial competition. They arise from an inability to generate the countervailing forces that orthodox economic theory still imagines will inevitably and promptly work to correct imbalances. The fact that, no matter how far prices fall, no private or institutional investor comes forward to buy after panic sets in by itself refutes the efficient markets hypothesis. But there is in fact one other investor who will buy: the government. The financial system, in other words, must look outside itself for its own salvation.