Financial Crises

wby do market economies experience financial crises? That a crisis is  the result of a coincidence of a large number of special causes is never a plausible explanation. This is especially so once we recognize how often crises occur. They are fairly frequent internationally and throughout history indeed, they are pervasive in market economies. Understanding crises is important for avoiding them. But to understand them, it is vital to first understand why we didn't think one could happen again in the United States. The crisis led many to question why the credit rating agencies and bank regulators never saw the possibility of a crisis coming. Banks held too many assets of the type that later became problems didn't somebody understand the risks? The idea that no one saw the possibility of a crisis is a widespread idea, so much so that best-selling books have popularized the idea that a small band of misfit hedge-fund operators were actually geniuses who saw the crisis coming when all the others did not. Many saw a crisis looming, but what no one saw was the size of it, that it would be a global systemic crisis. It is understandable why politicians did not understand the crisis and did not expect one they are not experts in economics. Nor could they ever be expert on every issue that confronts them, from health care to foreign