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Stages of the Ongoing Global Financial Crisis: Is There a Wandering Asset-Price Bubble?

26 Pages Posted: 21 Jul 2009  

Lucjan T. Orlowski

Sacred Heart University - John F. Welch College of Business

Date Written: July 21, 2009

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 with contagion effects on other financial institutions, the commodity price bubble, and the ultimate demise of investment banking in the U.S. Monetary policy responses aimed at stabilizing financial markets are proposed. The study argues that the severity of the crisis is influenced strongly by changeable allocations of global savings, which lead to over-pricing of varied types of assets. The study calls such process a “wandering asset-price bubble”. Unstable allocations have elevated market, credit and liquidity risks. Since its original outbreak induced by the demise of the subprime mortgage market and the mortgage-backed securities in the U.S., the crisis has reverberated across other credit areas, structured financial products and global financial institutions.

Keywords: subprime mortgage crisis, credit crisis, liquidity crisis, market risk, credit risk, default risk, Level 3 assets, Basel II

JEL Classification: G12, G15, G21, G24

Suggested Citation

Orlowski, Lucjan T., Stages of the Ongoing Global Financial Crisis: Is There a Wandering Asset-Price Bubble? (July 21, 2009). CASE Network Studies and Analyses No. 372. Available at SSRN: https://ssrn.com/abstract=1436893 or http://dx.doi.org/10.2139/ssrn.1436893

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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