Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy

Intermezzo: A Brief History of Finance and Credit

The great credit boom-and-bust cycle of the early twenty-first century was a typical bubble. It had its supporters and early detractors; there were the usual tortured rationales to explain what was unusual economic behavior; and there was a land rush to grab short-term profits despite increasingly obvious risks. As is often the case, it went on much longer than one would have reasonably expected.

One aspect of this credit boom, however, stands out as particularly unusual: the astonishing shift in the fundamental basis of credit transactions.

Throughout the history of human finance, the underlying premise of any lending, credit, or financing—indeed, all loans, mortgages, and debt instruments—has always been the borrower's ability to repay the loan. It is the most basic aspect of all finance.

This system of economic transactions goes as far back as when Og lent the guy in the next cave a dozen clamshells so he could purchase that newfangled wheel. If Og didn't have a reasonable basis to expect his neighbor would be able to service that debt—Is he a good hunter? Is he trustworthy? Will he be able to repay those clamshells?—he never would've entered into what was the first commercial loan.

From 1 million b.c. up until the present day, the ability to repay the debt has always been the dominant factor—except, however, for a brief five-year period starting around 2002. During that short era, the fundamental basis of all credit transactions ...