ABSTRACT
One of the most striking features of the United States’ financial sector meltdown in the spring of 2008 is how eerily familiar it felt to the historically minded: rapidly mounting transactions in markets lacking transparency and oversight, threatening not only financial institutions but the economy as a whole. In 1930, it had been commercial banks. In 2008, it was “shadow banks”, well beyond regulators’ reach, engaged in the private trading of complex instruments like collateralized debt obligations, blessed by rating agencies but impossible to value accurately, and coupled with hedges that no one understood in their totality while they were shuffled like hot potatoes among players that were leveraged on average 30:1 or more. The market for one of the hedging instruments alone – credit default swaps – had reached $40 trillion, most of it in a span of just two years (Schwartz and Creswell 2008). When this bubble burst in a credit market freeze, it generated the equivalent of old-fashioned runs on the banks that required federal bailouts to prevent systemic collapse.
