And, as in earlier cases, there was at least some rationale for the initial exuberance. There were credible arguments, for example, that business cycle risks had been genuinely reduced.2 Some thought that this could justify an increased appetite for risky assets.
The second line of explanation focuses on the distinctive risk factors that came to the fore in the GFC and made this financial cycle different from others. They included the expansion in US sub-prime lending in the decade leading up to the crisis, the subsequent downturn in the US housing market and the resultant collapse in markets for mortgage-backed securities.