IDEAS home Printed from
   My bibliography  Save this article

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


  • 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.

Suggested Citation

  • Romain Ranciere & Aaron Tornell, 2011. "Was the U.S. Crisis a Financial Black-Hole?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(2), pages 271-305, June.
  • Handle: RePEc:pal:imfecr:v:59:y:2011:i:2:p:271-305

    Download full text from publisher

    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 search for a different version of it.

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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). General contact details of provider: .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.