Sucker punched by the invisible hand: the world financial markets and the globalization of the US mortgage crisis (original) (raw)

How did a domestic housing slump turn into a global financial crisis?

Journal of International Money and Finance, 2012

The global financial crisis clearly started with problems in the U.S. subprime sector and spread across the world from there. But was the direct exposure of foreigners to the U.S. financial system a key driver of the crisis, or did other factors account for its rapid contagion across the world? To answer this question, we assessed whether countries that held large amounts of U.S. mortgage-backed securities (MBS) and were highly dependent on dollar funding experienced a greater degree of financial distress during the crisis. We found little evidence of such "direct contagion" from the United States to abroad. Although CDS spreads generally rose higher and bank stocks generally fell lower in countries with more exposure to U.S. MBS and greater dollar funding needs, these correlations were not robust, and they fail to explain the lion's share of the deterioration in asset prices that took place during the crisis. Accordingly, channels of "indirect contagion" may have played a more important role in the global spread of the crisis: a generalized run on global financial institutions, given the opacity of their balance sheets; excessive dependence on short-term funding; vicious cycles of mark-to-market losses driving fire sales of MBS; the realization that financial firms around the world were pursuing similar (flawed) business models; and global swings in risk aversion. The U.S. subprime crisis, rather than being a fundamental driver of the global crisis, may have been merely a trigger for a global bank run and for disillusionment with a risky business model that already had spread around the world.

Cross-country causes and consequences of the 2008 crisis: early warning

2009

ABSTRACT This paper models the causes of the 2008 financial crisis together with its manifestations, using a Multiple Indicator Multiple Cause (MIMIC) model. Our analysis is conducted on a cross-section of 107 countries; we focus on national causes and consequences of the crisis, ignoring cross-country “contagion” effects. Our model of the incidence of the crisis combines 2008 changes in real GDP, the stock market, country credit ratings, and the exchange rate.

Lineages of the 2008-2010 Global Economic Crisis: Exposing Shifts in the World Economic Order

On 15 September 2008, the supposedly safe, perpetually prosperous world of the post-industrial global economic system blew itself up when Lehman Brothers filed for Chapter 11 bankruptcy. The 158-year old iconic investment bank was forced into this act of extremes when the collapse of the US sub-prime mortgage market turned the securitised mortgage-backed debt obligations into toxic assets. Initially, 7.8bnofitsmortgage−relatedbondswereconsideredworthless,butthebankalsoadmittedthatitstillhad7.8bn of its mortgage-related bonds were considered worthless, but the bank also admitted that it still had 7.8bnofitsmortgage−relatedbondswereconsideredworthless,butthebankalsoadmittedthatitstillhad54bn of exposure to hard-to-value mortgage-backed securities. Today, more than one year after Lehman Brothers’ sensational collapse, the entire world economy is in the grips of the most severe synchronised global recession since before the Second World War. The global crisis has yet to bottom out and ‘fire-fighting still remains the order of the day. The enormous stock market bubble that has formed over the past eight months is considered the main source of another possible crash, reflected in Der Spiegel’s sensational front page headline, «The trillion bomb ». The huge budget deficits in Greece, Ireland, Italy, Portugal and Spain threaten to break the euro’s back. Public finances of Britain, which is not a member of the Eurozone, are in a worse position than those of Greece, according to the latest figures on government borrowing, released by the Office for National Statistics in January 2010.

Cross-country experiences and policy implications from the global financial crisis

Economic Policy, 2010

The financial crisis of 2007-2008 is rooted in a number of factors, some common to previous financial crises, others new. Analysis of post-crisis macroeconomic and financial sector performance for 58 advanced countries and emerging markets shows a differential impact of old and new factors. Factors common to other crises, like asset price bubbles and current account deficits, help to explain cross-country differences in the severity of real economic impacts. New factors, such as increased financial integration and dependence on wholesale funding, help to account for the amplification and global spread of the financial crisis. Our findings point to vulnerabilities to be monitored and areas of needed national and international reforms to reduce risk of future crises and cross-border spillovers. They also reinforce a (sad) state of knowledge: much of how crises start and spread remains unknown.