Who Caused This Disaster?

Abstract

The first three chapters have been devoted to understanding how the financial crisis developed. It has been argued that the house price bubble and the credit bubble that supported it created massive amounts of wildly overvalued mortgage-related assets and derivatives. While many of these assets and derivates were spread throughout the international financial system, large quantities were concentrated in the hands of several important and highly leveraged financial institutions. When the house price bubble collapsed, these assets lost much of their value and several key firms were made insolvent. Because information about the extent of the losses and their location was and remains limited, there was a general loss of confidence in and between financial institutions. For those firms unable to disguise or weather their losses, debt-holder runs followed quickly, forcing bankruptcy or government rescue.