A foreclosed home in Stockton, California, May 2008. 
Robert Galbraith / REUTERS

At the turn of this century, most economists in the developed world believed that major economic disasters were a thing of the past, or at least relegated to volatile emerging markets. Financial systems in rich countries, the thinking went, were too sophisticated to simply collapse. Markets were capable of regulating themselves. Policymakers had tamed the business cycle. Recessions would remain short, shallow, and rare.

Seven years later, house prices across the United States fell sharply, undercutting the value of complicated financial instruments that used real estate as collateral—and setting off a chain of consequences that brought on the most

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