Collateral damage of the global financial crisis has gone much farther than a mere financial event. It has worsened income inequality, especially in the developed countries, and eroded people’s trust in institutions and governments. This has given rise to an anomalous mix of populist and nationalist trends in societies and loss of faith in the merits of global policy cooperation and trade. Capitalism has come under scrutiny, both in open words and also in yet unspoken words, compromising the very ideal of free markets. This should not be allowed to take hold because free markets, despite all past abuses by bad people and firms, have produced tremendous gains in economic and social welfare since the 19th century. We cannot allow bad finance to hijack free markets. We cannot allow bad capitalism to drive out free markets.

The world needs a new paradigm of finance. Using terminology from political economics, we need to formulate a new “social contract” between policy makers, financial markets and people. This contract should remind us about the role of finance in our lives and redefine the real purposes of financial regulation and economic policy. The guiding principle is simple: a financial system is good for the society when it serves the basic functions outlined in the first paragraph of Chapter One – and does nothing more. It is bad when it produces complex inner structures to hinder these functions and turns into a positivesum trade for itself by stealing from the main street. A bad businessman is bad but a bad financier is twice as bad.

Brief politics of household debt

This is not a book about the sociology or morality of debt in human societies. Several interesting new books deal with such issues to draw a different perspective to the 2008 financial crisis (Shiller, 2012; Plender, 2016; Bookstaber, 2017; Desai, 2017 and Tooze, 2018). However, in search for a solution to excessive debt, it may be useful to understand why people jump on credit whenever and however it is offered. Why do many people borrow more money than they can ever pay back? Why do banks and other creditors, with all their expertise in financial affairs, give out so much unpayable credit?