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and economic collapse has induced unprecedented government rescue efforts that have been, to date, unable to end the crisis. In the next section of the paper we present a description of key structural flaws in the financial institutions and practices of the neoliberal era that helped generate the current crisis. This section is taken from a much more detailed analysis of these structural flaws (see Crotty, 2008).

2. Key structural flaws of the new financial architecture新金融体系结构的关键结构缺陷

2.1 The NFA is built on a very weak theoretical foundation
The NFA is based on light regulation of commercial banks, even lighter regulation of investment banks and little, if any, regulation of the ‘shadow banking system’—hedge and private equity funds and bank-created Special Investment Vehicles (SIVs). Support for lax regulation was reinforced by the central claim of neoclassical financial economics that capital markets price securities correctly with respect to expected risk and return. Buyers and sellers of financial securities were, it was argued, able to make optimal decisions that led to risk being held only by those capable of managing it. The celebratory narrative associated with the NFA states that relatively free financial markets minimise the possibility of financial crises and the need for government bailouts (see Volcker, 2008, for a summary of this narrative). Crotty (2008) explains that this theoretical cornerstone of the NFA is based on patently unrealistic assumptions and has no convincing empirical support. Thus, the ‘scientific’ foundation of the NFA is shockingly weak and its celebratory narrative is a fairy tale. 1 See Crotty (2002) for an explanation of the historical economic and political processes through which the neoliberal regime came to replace Golden Age institutions and practices.

2.2 The NFA has widespread perverse incentives that create excessive risk, exacerbate booms and generate crises
The current financial system is riddled with perverse incentives that induce key personnel in virtually all important financial institutions—including commercial and investment banks, hedge and private equity funds, insurance companies and mutual and pension funds—to take excessive risk when financial markets are buoyant.1 For example, the growth of mortgage securitisation generated fee income—to banks and mortgage brokers who sold the loans, investment bankers who packaged the loans into securities, banks and specialist institutions who serviced the securities and ratings agencies who gave them their seal of approval. Since fees do not have to be returned if the securities later suffer large losses, everyone involved had strong incentives to maximise the flow of loans through the system whether or not they were sound. Total fees from home sales and mortgage securitisation from 2003 to 2008 have been estimated at $2 trillion (Financial Times, 2008C). Top investment bank traders and executives receive giant bonuses in years in which risk-taking generates high revenue and profits. Of course, profits and bonuses are maximised in the boom by maximising leverage, which in turn maximises risk. In 2006, Goldman Sachs’ bonus pool totaled $16 billion—an average bonus of $650,000 very unequally distributed across Goldman’s 25,000 employees. Wall Street’s top traders received bonuses of up to $50 million that year. In