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

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  • Lucjan T. Orlowski

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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Bibliographic Info

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

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

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

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  1. Svensson, L.E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Papers 646, Stockholm - International Economic Studies.
  2. Froot, Kenneth A & Scharftstein, David S & Stein, Jeremy C, 1992. " Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation," Journal of Finance, American Finance Association, vol. 47(4), pages 1461-84, September.
  3. Danielle DiMartino & John V. Duca, 2007. "The rise and fall of subprime mortgages," Economic Letter, Federal Reserve Bank of Dallas, vol. 2(nov).
  4. Danielle DiMartino & John V. Duca & Harvey Rosenblum, 2007. "From complacency to crisis: financial risk taking in the early 21st century," Economic Letter, Federal Reserve Bank of Dallas, vol. 2(dec).
  5. 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.
  6. Buiter, Willem H, 2007. "Lessons from the 2007 Financial Crisis," CEPR Discussion Papers 6596, C.E.P.R. Discussion Papers.
  7. Stephen P. A. Brown & Raghav Virmani & Richard Alm, 2008. "Crude awakening: behind the surge in oil prices," Economic Letter, Federal Reserve Bank of Dallas, vol. 3(may).
  8. 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.
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Cited by:
  1. Marek Dabrowski, 2009. "The Global Financial Crisis: Lessons for European Integration," CASE Network Studies and Analyses 0384, CASE-Center for Social and Economic Research.
  2. Elisabeth Paulet, 2009. "The Subprime Crisis and the European Banking Sector: the Renewal of Universal Banks?," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 11(Number Sp), pages 684-697, November.

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