IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Was the U.S. Crisis a Financial Black-Hole?

Listed author(s):
  • Romain Ranciere
  • Aaron Tornell

This paper argues that the U.S. financial crisis is a new type of crisis: a “financial black hole.” Financial black-holes are characterized by the breaking-up of credit market discipline and the large-scale financing of negative net present value projects. In a theoretical model, the paper explains how the interaction of perceived government guarantees and the ability to issue catastrophe-bond-like liabilities generates financial black-holes. The paper then shows that key facts of the recent U.S. crisis can simultaneously be rationalized by the financial black hole equilibrium: Between 2003 and 2006, the origination of catastrophe-loan type mortgages exploded, as well as the issuance of ‘Private Label’ mortgage-backed securities that helped off-load them into the market. During the same period, there was a massive increase in the origination of mortgages to borrowers with limited repayment ability, absent a continuous increase in home prices. While this situation should have led to an upward repricing of the risk associated with Private Label MBS, the contrary occurred and the spread on these securities actually declined. While each of these facts in isolation can be interpreted differently, the strength of the financial black-hole explanation is its ability to account for the combination of these key facts.

If 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.

File URL:
File Function: Link to full text PDF
Download Restriction: Access to full text is restricted to subscribers.

File URL:
File Function: Link to full text HTML
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Palgrave Macmillan & International Monetary Fund in its journal IMF Economic Review.

Volume (Year): 59 (2011)
Issue (Month): 2 (June)
Pages: 271-305

in new window

Handle: RePEc:pal:imfecr:v:59:y:2011:i:2:p:271-305
Contact details of provider: Web page:

Web page:

Order Information: Web:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pal:imfecr:v:59:y:2011:i:2:p:271-305. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)

or (Rebekah McClure)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.