Business

Stress Test: Reflections on Financial Crises (and the current one) – Quick Review

After the last few weeks, it clear we are in the biggest financial crisis in our generation. I read “Stress Test” a few months ago and there are several perspectives that are good to be remembered. Especially during these crazy days where the market shows ‘no bottom’.

“The fundamental causes of this crisis were familiar and straightforward,” Geithner writes. “It began with a mania — the widespread belief that devastating financial crises were a thing of the past, that future recessions would be mild, that gravity-defying home prices would never crash to earth.”

The causes of the crisis, in other words, were the same old-fashioned madness of crowds and extraordinary popular delusions responsible for every panic dating back to the Dutch mania for tulip bulbs. The entire society — including all the big banks and some nonbank financial firms, like the insurance company A.I.G. — simply ignored risk.

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