The Financial Crisis of 2007-2009: A Sketch of a Credible Explanation

Abstract

This paper provides a sketch of what a credible explanation for the financial crisis of 2007-09 might look like. It reviews in brief what I take to be the most important causal relationships: between US property prices and the liquidity of mortgage backed securities; between regulatory incentives and wholesale market behaviour; between macro-economic policy and financial asset prices; and the political imperative to adopt social policies that (temporarily, at least) mitigated some of the consequences of global economic development.

Keywords: Financial crisis, property prices, regulatory capital, Triffin dilemma

JEL Classification: E44, G01, G21, G23, G28