Stages of the 2007/2008 Global Financial Crisis: Is There a Wandering Asset Price Bubble?

Economics E-Journal Discussion Paper No. 2008-43

40 Pages Posted: 20 Jan 2009  

Lucjan T. Orlowski

Sacred Heart University - John F. Welch College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 18, 2008

Abstract

This study identifies five distinctive stages of the current global financial crisis: the meltdown of the subprime mortgage market; spillovers into broader credit market; the liquidity crisis epitomized by the fallout of Northern Rock, Bear Stearns and Lehman Brothers with counterparty risk effects on other financial institutions; the commodity price bubble, and the ultimate demise of investment banking in the U.S. The study argues that the severity of the crisis is influenced strongly by changeable allocations of global savings coupled with excessive credit creation, which lead to over-pricing of varied types of assets. The study calls such process a "wandering asset-price bubble". Unstable allocations elevate market, credit and liquidity risks. Monetary policy responses aimed at stabilizing financial markets are proposed.

Keywords: subprime mortgage crisis, credit crisis, liquidity crisis, market risk, credit risk, default risk, counterparty risk, collateralized debt obligations, Level 3 Assets, Basel II

JEL Classification: G12, G15, G21, G24

Suggested Citation

Orlowski, Lucjan T., Stages of the 2007/2008 Global Financial Crisis: Is There a Wandering Asset Price Bubble? (December 18, 2008). Economics E-Journal Discussion Paper No. 2008-43. Available at SSRN: https://ssrn.com/abstract=1326649 or http://dx.doi.org/10.2139/ssrn.1326649

Lucjan T. Orlowski (Contact Author)

Sacred Heart University - John F. Welch College of Business ( email )

5151 Park Avenue
Fairfield, CT 06825
United States
203-371-7858 (Phone)

HOME PAGE: http://www.sacredheart.edu/ltorlowski.cfm

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