1. 1
Paradigm Shift
The false premise of effortless prosperity
Paradigm Shift;
1. the term first coined by Thomas Kuhn in his influential book The Structure of
Scientific Revolutions (1962) to describe a change in basic assumptions within the
ruling theory of science. It is in contrast to his idea of normal science.
2. A complete change in thinking or belief systems that allows the creation of a new
condition previously thought impossible or unacceptable
Contrary to recent published thinking, the financial crisis was not an unpredictable ‘black
swan’ event, nor was it solely the result of a collapse in the housing market, or solely to
be blamed on the global imbalance between China and the US or on greedy bankers.
Instead, the financial crisis was caused by a sustained period of debt financed
consumption, made possible by the belief in the ‘paradigm shift’ that through economic
policy and financial market innovation, we had created an economic model that would
create effortless prosperity and growth, whilst enjoying a prolonged period of low
interest rates. Under Alan Greenspan this was known as the ‘Goldilocks economy’,
Gordon Brown called it the ‘end of boom and bust’.
This premise was false.

2.
STRICTLY PRIVATE & CONFIDENTIAL
2
The financial crisis was caused by unsustainable debt financed consumption...not just built
on mortgages but across borrower classes (corporate, consumer, government)....
...allowed by low interest rates and financial innovation which allowed the transfer of
counter‐party risk of borrowers by lenders like never before (‘originate & distribute’)...
...but when interest and mortgage ‘teaser’ rates rose, borrowers defaulted and loan losses
soared...whilst the innovation had allowed diversification of risk, this was actually
concentrated in financial institutions who had to keep the residual ‘super‐senior’ of credit
derivatives on their balance sheets which collapsed in value, destroying their bank capital
Total US Consumer Credit Debt ($ Trl) 2000‐2010
Source: Federal Reserve
Total US Mortgage Debt ($ Trl) 2000‐2010
Source: Federal Reserve
Fed Funds Rate (%) 2000‐2008
Source: Federal Reserve
US Asset Backed Issuance 2000‐2008 ($ml)
Source: SIFMA
All Bank Loan Delinquency Rate (%) 2000‐2009
Source: Federal Reserve

3.
STRICTLY PRIVATE & CONFIDENTIAL
3
Where were the regulators?
The ‘paradigm shift’ in thinking, that financial market innovation and economic policy
created effortless prosperity and growth with low interest rates, was false.
Regulators were behind the curve and had no pressure to curb the credit bubble from
governments and central banks who were not concerned because;
‐ Credit bubble was not presented in the inflation measures (RPI/CPI) which were
subdued because of deflationary influence of increasingly low cost production of
electronic and consumer goods from China and EM
‐ Inflation measures did not include asset prices
‐ Government policy to create ‘stakeholder’ economy beginning in 1990s promoted
home ownership for all, even if they couldn’t afford it
‐ Belief in the paradigm shift, ‘goldilocks economy’