I think ‘magical thinking’ is apt for what brought down our financial system, but it’s a view from hindsight, not foresight, and altogether too imprecise. I wrote my first comprehensive paper on growth induced collapse 30 years to the day before the Fed called this one to a halt.
The problem now as seen from foresight then is that the difference between a ‘bubble’ and a sustainable system is that both are designed to develop by compound growth, and the bubble is designed to keep growing to end in collapse at it’s growth peak rather than stabilize.
It’s like feeding an addict with their drug, because that’s what they ask for and you like giving them because you get more of it too. Our whole economic system actually happens to be designed as a bubble in that way, to grow until it fails and never stabilize.
Nature allows us some easy misunderstandings, but it’s the magical belief that presently unlimited resources won’t ever run into limits that makes our whole economic system act as if it can multiply without limit, drawing the gullible into believing self-fulfilling promises as in a Ponzi scheme. It’s a problem.
Historically what has kept the system going is that those who profited from such schemes got away with it and let others suffer the consequences. That won’t suffice today because the world is much too interdependent. Today the one set of deep pockets not yet being called upon to contribute too resurrecting our financial system, of course, are the people who profited from the spiral of magical promises and got away with the money before it crashed.
The active cause of the collapse was actually their withdrawal of capital from risk, their “flight to safety”. It wasn’t the brokers, it was their clients who cut and ran. Any “prudent man” having profited in that way, and seeing that their spontaneous reaction of self protection would bring about a collapse of the whole system of commerce, would gladly give up their winnings to get that back.