Hans Christian Andersen’s fairy tale about the “The Emperor’s New Clothes” is a good explanation for the spectacular expansion and implosion of the bubble economy in the 2000s.
For a time, a collective suspension of disbelief allowed markets and investors to ignore risks produced by cheap credit, subprime mortgages, securitisation and the shadow banking system.
The system worked until someone impolitely shouted out the risk had not gone away, it was just hidden in plain sight, and many institutions were insolvent.
But how many people remember how the fairy tale ends?
“‘But he has nothing on at all,’ said a little child at last. ‘Good heavens! Listen to the voice of an innocent child,’ said the father, and one whispered to the other what the child had said. ‘But he has nothing on at all,’ cried at last the whole people.
“That made a deep impression upon the emperor, for it seemed to him that they were right; but he thought to himself ‘Now I must bear up to the end.’ And the chamberlains walked with still greater dignity, as if they carried the train which did not exist.”