Historical Perspectives on the Financial Crisis

This Essay discusses two historical parallels between the current financial
crisis and the financial crisis of the late 1920s and 1930s. First, financial
innovation was at the core of both crises. In particular, the machinations of
Ivar Kreuger illuminate how financial innovation tends to outstrip the ability,
and perhaps the willingness, of investors and intermediaries to process
information. Second, reliance on credit ratings began as a response to the 1929
crash and became a primary cause of the recent crisis. During the 1930s,
regulators developed rules based on credit ratings; those rules are the
ancestors of today’s widespread regulatory reliance on ratings. Without
financial innovation and overreliance on credit ratings, the recent crisis likely
would not have occurred, and certainly would not have been as deep.