Financial inflation leads to bigger balance sheets, both assets and liabilities. This creates a sense of prosperity, and selfcongratulation on the part of bankers, financiers and finance directors of firms. Disillusion sets in when financial inflation fails. When deflation sets in it reveals the self-delusion of markets, habituated to apparently endless capital gains from asset inflation, and the self-delusion of economists, habituated to convenience thinking that attributed such inflation to a prosperous equilibrium among rational optimising agents such as they conceive themselves to be. Effective understanding must look beyond the delusions created by markets to the structural shifts in the markets that account not only for the crisis (which excludes most theories of equilibrium among rational, optimizing agents) but also for the years of financial boom (which excludes most disequilibrium/euphoria-based theories of financial crisis).

The crisis that broke out in 2007 is a crisis of asset inflation and collateralised lending. Asset inflation involves the rise in asset values. In the past this has been attributed to expectations of higher future earnings (in the case of capital market assets such as stocks or shares), or the scarcity of the asset (in the case of housing assets). Neither of these factors can satisfactorily explain the long boom in asset values that has affected the US and UK markets, and their abrupt end in 2008.