THE current financial crisis is merely a severe example of the panics and crashes that have dotted economic history. Lenders and borrowers have regularly overestimated the latter’s ability to repay their debts; when the truth becomes clear, banks collapse and confidence in the financial system deteriorates.
As Scott Reynolds Nelson shows in his history of American financial crises, there have been many parallels with recent events. The subprime loans that sparked the current crisis were modern versions of the promissory notes, bills of exchange and bankers’ acceptances that were used in the past; all are “promises to repay”. Such promises are easy to make in a boom but harder to keep when times change.
Economic history: A dance to the music of debt | The Economist