The period preceding the global financial crisis that started in 2008 was one characterized by ample liquidity, a credit boom, and low yields in a wide range of asset classes. It was also defined by the accumulation of risks on and off the balance sheets of many financial intermediaries, particularly banks, as well as a substantial increase in public and private sector debt in some countries. Understanding the relation between liquidity and the excessive accumulation of risks remains a central policy question. How do credit booms affect incentives? In the case of the government sector, credit booms may affect the incentives of different interest groups to agree on policies for reform or fiscal stabilization. In the case of the private sector, it may change the incentives that originators have to produce good assets. Credit booms complicate inference and make it difficult to evaluate the benefits and costs of alternative policies and strategic choices as well as monitor agents. Finally, credit booms facilitate the entrenchment of interest groups and may lead to a deterioration of governance institutions.