Sucker Punched by the Invisible Hand
AbstractThe worldwide financial crisis of 2007-2010 was set off by the collapse of the subprime mortgage market in the U.S. This crisis caused widespread banking failure in the U.S. and forced the federal government to provide a massive bailout to the financial sector. The crisis simultaneously reverberated to banks around the world, and eventually brought about a worldwide recession. This paper documents why Western European countries were so susceptible to the housing price downturn. We explore various mechanisms by which the financial crisis might have spread including the existence of similar regulatory schemes, government deficits and current account imbalances, export connectedness, and the presence of a housing bubble. We present a surprising result: European banks went down because they had joined the market in the U.S. for mortgage backed securities and funded them by borrowing in the asset backed commercial paper market. They were pursuing the same strategies to make profit as the American banks, and when the housing market turned down, they suffered the same fate as their U.S. counterparts. Our study makes a broader theoretical point suggesting that subsequent studies of global finance and financial markets need to know something about the identities and strategies of the banks that structure the main markets for different products. This insight has implications for the literatures on financialization, globalization, and the sociology of finance.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Institute of Industrial Relations, UC Berkeley in its series Institute for Research on Labor and Employment, Working Paper Series with number qt1754s7tz.
Date of creation: 03 Sep 2012
Date of revision:
Social and Behavioral Sciences; Worldwide Financial Crisis of 2007-2010;
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Acharya, Viral V. & Schnabl, Philipp & Suarez, Gustavo, 2013.
"Securitization without risk transfer,"
Journal of Financial Economics,
Elsevier, vol. 107(3), pages 515-536.
- Acharya, Viral V & Schnabl, Philipp & Suarez, Gustavo, 2012. "Securitization Without Risk Transfer," CEPR Discussion Papers 8769, C.E.P.R. Discussion Papers.
- Viral V. Acharya & Philipp Schnabl & Gustavo Suarez, 2010. "Securitization without risk transfer," NBER Working Papers 15730, National Bureau of Economic Research, Inc.
- Andrew K. Rose & Mark M. Spiegel, 2010.
"Cross-Country Causes and Consequences of the Crisis: An Update,"
NBER Working Papers
16243, National Bureau of Economic Research, Inc.
- Rose, Andrew K. & Spiegel, Mark M., 2011. "Cross-country causes and consequences of the crisis: An update," European Economic Review, Elsevier, vol. 55(3), pages 309-324, April.
- Andrew K. Rose & Mark M. Spiegel, 2011. "Cross-country causes and consequences of the crisis: an update," Working Paper Series 2011-02, Federal Reserve Bank of San Francisco.
- Rose, Andrew K & Spiegel, Mark, 2010. "Cross-Country Causes and Consequences of the Crisis: An Update," CEPR Discussion Papers 7901, C.E.P.R. Discussion Papers.
- Tobias Adrian & Brian Begalle & Adam Copeland & Antoine Martin, 2012.
"Repo and securities lending,"
529, Federal Reserve Bank of New York.
- Fligstein, Neil & Goldstein, Adam, 2010. "The Anatomy of the Mortgage Securitization Crisis," Institute for Research on Labor and Employment, Working Paper Series qt9bh786v2, Institute of Industrial Relations, UC Berkeley.
- Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
- Moser, Thomas, 2003. "What Is International Financial Contagion?," International Finance, Wiley Blackwell, vol. 6(2), pages 157-78, Summer.
- Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153, October.
- Frieden, Jeffry A., 1991. "Invested interests: the politics of national economic policies in a world of global finance," International Organization, Cambridge University Press, vol. 45(04), pages 425-451, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lisa Schiff).
If references are entirely missing, you can add them using this form.