financial armegeddon: how could ALL of the people be fooled all the time?

The world-wide economic crisis was caused by mistakes.
Okay… every expert makes a mistake sometimes; but how did it happen that each and every expert on planet Earth made the same mistake? Tens of thousands of people, all with Phds and decades of practical experience in the real world, yet not one single person tried (or dared) to stop it?

I’m posting this in GQ because (even though there is no factual explanation for to stupidity), I want to learn the facts that the bank managers relied on while they were being so stupid.
What was their logic when inventing all those new financial instruments? They knew that the whole system they invented was just as unsustainable as a Ponzi scheme.

Or am I wrong, and maybe there actually was a factual, logical reason to think that the system could continue forever?

Many people weren’t fooled. Unfortunately, their voices weren’t heard. I suspect a lot of paycheques depended on keeping up the hype.

Some people did understand that the growth was not sustainable when the market was viewed as a whole. However on a microeconomic scale, each individual financial transaction made sense. When you took a look at you investment opportunities, plugged your variables into your risk models, and got a result that said there was a high likelihood you would make money, you just ran with it. Not enough people asked whether the models would still be valid tomorrow if market conditions changed substantially.

It happens again and again when assumptions are not periodically challenged (Long-Term Capital Management being another famous example).

The problem is that if other companies or employees in your company are making money doing stupid things you pretty much have to do it as well or your stockholdeers/boss are going to comare you to them.

Right, because you also know that when it all comes crashing down, nobody’s going to particularly single you out as a screw-up, because, you know, everybody was fooled (and additionally, you still get to keep the bonus money you made before things fell apart).

A couple comments. First, there were conservative CEOs who were taken in by the hype. Shareholders demanded and got their resignation. About five years ago, Warren Buffett called derivatives “weapons of financial mass destruction”. You could do worse than follow Warren Buffett’s lead in anything financial. (Could you do better?)

A few days ago, I read in the NY Times some CEO complaining that if the government began regulating financial institutions they would be unable to innovate! If only.

As others have written, it was not “each and every expert on the Planet Earth”. There were plenty of people who foresaw the current crisis. It’s just that the majority did not and they dragged everyone else along with them.