Compensation for risk was too low across a broad array of credits. Ironically, an important contributor to these misalignments in spending and lending was the long period of economic expansion and low inflation over the past 25 years, interrupted only a few times by mild recession.
This good economic performance provided skewed data and bred complacency: House prices could only go up; income interruptions and problems servicing debt were likely to be short lived; financial markets would always be liquid. Models based on theory and estimated with data from the 1990s and early 2000s fit well – too well.