However, due to the existing flaws in the financial system and distorted incentive structures, the rating agencies issued unrealistically high ratings to new issuances, thereby contributing to the build-up of systemic risks. The crisis shows that the systemic risks posed by the immensely complex financial system were masked by the benign macroeconomic outcomes characterized as the “great moderation”.
This prolonged period of high output growth and low inflation was essentially attributed to free markets and successful globalisation. During the golden years, financial economists believed that free-market economies could never go astray which is belied by the crisis (Krugman, 2009).