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

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  • Lucjan T. Orlowski

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.

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Bibliographic Info

Paper provided by CASE-Center for Social and Economic Research in its series CASE Network Studies and Analyses with number 0372.

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Length: 26 Pages
Date of creation: 2008
Date of revision:
Handle: RePEc:sec:cnstan:0372

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Related research

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

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References

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  1. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1990. "Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation," NBER Working Papers 3250, National Bureau of Economic Research, Inc.
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  6. Svensson, Lars E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Seminar Papers 646, Stockholm University, Institute for International Economic Studies.
  7. Hui Tong & Shang-Jin Wei, 2008. "Real Effects of the Subprime Mortgage Crisis: Is it a Demand or a Finance Shock?," NBER Working Papers 14205, National Bureau of Economic Research, Inc.
  8. Hui Tong & Shang-Jin Wei, 2008. "Real Effects of the Subprime Mortgage Crisis," IMF Working Papers 08/186, International Monetary Fund.
  9. Orlowski, Lucjan T., 2008. "Relative inflation-forecast as monetary policy target for convergence to the euro," Journal of Policy Modeling, Elsevier, vol. 30(6), pages 1061-1081.
  10. 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).
  11. L. Randall Wray, 2008. "Financial Markets Meltdown: What Can We Learn from Minsky," Economics Public Policy Brief Archive ppb_94, Levy Economics Institute.
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  13. 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. Orlowski, Lucjan T., 2012. "Financial crisis and extreme market risks: Evidence from Europe," Review of Financial Economics, Elsevier, vol. 21(3), pages 120-130.

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