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This is the idea that I want to pursue here: that the gambling that Wall Street engaged in made sense to them given (1) “the environment of dangerously low interest rates,” (2) “complacency about asset-price inflation,” and (3) “light and lax regulation.” My focus will be on (3) “light and lax regulation” and (2) “complacency about asset-price inflation.” For our purposes, let us stipulate that (1) is also correct.

For, of all of the clues to this mystery, the one that should be most obvious is again the one that Moss’s graph describes best: the economy that drove itself off the cliff was a financial system operating under different rules from the stable and prosperous financial system of the forty years before. Until the early 1990s the key financial assets of our economy were subject to the basic regulatory regime given to us by the New Deal. But beginning in the 1980s, critical financial assets of our economy were exempted from that basic regulatory framework.

The rules of that regime are impossible to describe in detail, but simple to summarize. The most important financial assets were subject to a rule that required they be traded publicly, transparently, and subject to antifraud requirements.6 These rules achieved a number of objectives. First, they subjected traders to strong incentives to avoid fraud. Second, they kept key financial institutions from taking on too much risk. And third, they subjected the trades of critical financial assets to an important requirement of publicity—each time a financial asset was bought or sold, the market got something in return: information about the perceived value of the traded asset. That information helped the markets function more efficiently. Robust trading data produced robust prices; robust pricing ensured asset liquidity, at least during relatively normal times, which were many during the New Deal regulatory regime.

Beginning in the 1980s, however, and for our purposes, especially the 1990s, this regime changed. It didn’t change for the assets that had been regulated by the New Deal rules: stocks and bonds. It changed instead for a new class of financial instruments, derivatives, a tiny portion of the market at first, but one that quickly, like the Blob, exploded onto the market, and consumed much of its value.

“Derivatives” are assets whose value is derived from something else, where “something” could mean literally anything. I could have a derivative that pays me if the price of gold falls below $1,000. I could have a derivative that pays me if the temperature in Minot, North Dakota, rises above one hundred degrees Fahrenheit. A derivative is just a bet entered into by two or more parties. The terms of the bet are limited only by the imagination of the parties.

By calling this a “bet,” however, and by invoking remote American villages, I don’t mean to question the economic wisdom behind derivatives. To the contrary: Derivatives serve a valuable purpose. As with any contract, their aim is to shift risk within a market to someone better able to carry it. That’s a good thing, for the market, and the economy generally. That we’ve just seen an economy detonated by derivatives gone wild shouldn’t lead us to ban (as if we could) these financial innovations. It should, however, lead us to be more careful about them.

At the birth of this innovation, however, no one was thinking much about being careful. Nor thinking clearly. Too many made an error of aggregation: even if derivatives enabled individuals to diversify risk, they couldn’t reduce the risk for the system as a whole.7 That didn’t matter much at first, since the market for derivatives was initially tiny. A collapse in a tiny market doesn’t do much systemic harm.

Technology soon changed all this, making it possible for the market in derivatives to explode. With the digital revolution distributing computing power to the masses, masses of financial analysts on Wall Street were able to use this computing power to concoct ever-more-complicated financial