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

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Author Info
Lucjan T. Orlowski

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Abstract

This study argues that the severity of the current global financial crisis is strongly influenced by changeable allocations of the global savings. This process is named a “wandering asset bubble”. Since its original outbreak induced by the demise of the subprime mortgage market and the mortgage-backed securities in the U.S., this crisis has reverberated across other credit areas, structured financial products and global financial institutions. Four distinctive stages of the crisis are identified: the meltdown of the subprime mortgage market, spillovers into broader credit market, the liquidity crisis epitomized by the fallout of Bear Sterns with some contagion effects on other financial institutions, and the commodity price bubble. Monetary policy responses aimed at stabilizing financial markets are proposed.

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Paper provided by Halle Institute for Economic Research in its series IWH Discussion Papers with number 11-08.

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Date of creation: Sep 2008
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Handle: RePEc:iwh:dispap:11-08

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Related research
Keywords: subprime mortgage crisis; credit crisis; market risk; credit risk; default risk; Level 3 assets; Basel II;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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References listed on IDEAS
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  2. Stephen P. A. Brown & Raghav Virmani & Richard Alm, 2008. "Crude awakening: behind the surge in oil prices," Economic Letter, Federal Reserve Bank of Dallas, issue May. [Downloadable!]
  3. Michael Woodford, 2007. "The Case for Forecast Targeting as a Monetary Policy Strategy," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 3-24, Fall.
  4. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June. [Downloadable!] (restricted)
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  5. Stevans, Lonnie & Sessions, David, 2008. "Speculation, Futures Prices, and the U.S. Real Price of Crude Oil," MPRA Paper 9456, University Library of Munich, Germany, revised 04 Jul 2008. [Downloadable!]
  6. Danielle DiMartino & John V. Duca, 2007. "The rise and fall of subprime mortgages," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Nov. [Downloadable!]
  7. Buiter, Willem H, 2007. "Lessons from the 2007 Financial Crisis," CEPR Discussion Papers 6596, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. Danielle DiMartino & John V. Duca & Harvey Rosenblum, 2007. "From complacency to crisis: financial risk taking in the early 21st century," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Dec. [Downloadable!]
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