"Introduction" [2010] ELECD 688; in Mitchell, E. Lawrence; Wilmarth, Jr, E. Arthur (eds), "The Panic of 2008" (Edward Elgar Publishing, 2010)

Book Title: The Panic of 2008

Editor(s): Mitchell, E. Lawrence; Wilmarth, Jr, E. Arthur

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781849802611

Section Title: Introduction

Number of pages: 21

Extract:

Introduction
Thirty years of substantial deregulation based largely on neoliberal free
market philosophies unleashed a regime of finance capitalism in America.
Many American industrial corporations began to increase their reliance
on debt in the 1980s. By the 1990s, commercial and investment banks had
turned the invention of new financial derivatives into a major business,
and generated huge profits from dealing and trading in them. They also
discovered that profits from derivatives rose considerably as the instru-
ments and underlying assets were increasingly leveraged. The mantra of
`risk management' provided a tempting rationale for speculation that
often assumed reckless dimensions. The American economy reached a
point toward which it had aimed for a century ­ the dominance of finance
over industry, as many of the best minds from the academy and the most
talented from business were drawn to Wall Street.
As early as the 1950s, insightful thinkers like Peter Drucker predicted
a shift in the American economy from manufacturing to service. Less
clearly anticipated was a more dramatic, and ultimately more significant,
transformation from production to finance. The prolonged (if inconstant)
bull market that began in the 1980s and resumed after the 1987 market
crash made this shift look both inevitable and infinitely sustainable. By
the late 1990s, there was widespread acceptance of the view that a new era
in finance had come, that the old rules no longer applied and that virtually
limitless wealth was available to those who invested in old and new forms
of securities and relied on ...