Myriad changes to the financial framework have seemingly safeguarded the financial system from another 2008-style crisis. The best Wall Street finance institutions are these days better capitalized when compared to a decade back. There are “living wills,” along with various regulatory constraints which have limited the most egregious lending and leveraging mistakes that brought down Bear Stearns, Others and Lehman.

There are central bank or investment company swap lines and such, the kind of financial constructions that breed optimism. Gillian Tett was the preeminent journalist through the waning mortgage fund Bubble period. She was apparently only in illuminating the amount of excess in subprime Credit default swaps and organized fund more generally. By March 2008, she experienced already acknowledged “the worst financial meltdown in seven decades,” while Wall Street was stuck in denial.

Ms. Tett also appreciated the harm being done to Federal Reserve trustworthiness. Yet nobody could have anticipated the evolution of policy measures adopted by the Fed and global central bankers over the following decade. Credibility’s New Lease on Life. 400 billion Wall Street institution. It over was not. I used to be convinced the overriding issue was Trillions of mispriced securities and derivatives throughout the markets – the enormous gap between perceptions and reality.

Both the financial system and economy had grown influenced by rapid Credit growth. Moreover, mortgage financing got come to dominate overall system Credit, while debts growth was increasingly vulnerable to risk intermediation fragilities. Speculative leverage, closely interlinked with risk intermediation also, had evolved into a major source of marketplace liquidity.

Risk aversion got started to significantly restrict access to Credit for the weakest borrowers, and home price declines acquired commenced in many locations. The financial system was levered in dangerous Credit, as the real economy was seriously maladjusted from previous distortions in the stream of spending and investment. At the right time, the Fed-orchestrated Bear Stearns bailout only reinforced the misperception that Washington could forestall financial dislocation. This guaranteed that the inevitable crisis of confidence would confirm catastrophic. I have long argued that a Bubble in junk bonds would not be perilous from a systemic standpoint.

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Only so many obviously dangerous bonds would be issued before the market place declares, “No more!” Working market mechanisms control the length of time and range of such booms, thereby limiting structural financial and economic maladjustment. A boom funded by “money” is inherently problematic – and potentially disastrous. The insatiable demand for recognized safe and liquid stores of value creates the scope for extended systemic booms.

So long as confidence is suffered in the underlying money-like financial musical instruments, ongoing monetary expansion (inflation) can continue steadily to inflate securities and asset prices, spending, investment and financial output. All the sophisticated mortgage finance Bubble-era Credit risk and structures intermediation distorted risk perceptions, spurring inordinate demand for Credit (and fund more generally). Underpinning all the financing, leveraging and speculation was the belief that Washington wouldn’t tolerate an emergency in either mortgage finance or casing.