Why economies crash

When money-makers take on more risks than are in society’s interests, regulators must strike the right balance between risk-taking and risk aversion.

The Marriner S. Eccles Federal Reserve Board Building in Washington. PHOTO: NYTIMES
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As Britain and France duked it out for global pre-eminence, and Europe fought over its colonies in the New World during the Seven Years War from 1756 to 1763, a Dutch bank called De Neufville Brothers grew rich by bankrolling the conflict.

The way De Neufville made its money was thoroughly modern: rapid, irresponsible financial innovation. Cheap, short-term borrowing used to make long-term loans at high interest rates, involving long chains of obligations spanning multiple banks and countries.

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