Anatomy of the Financial Crisis
The global financial crisis is a year old this month. Here is why the crisis went so deep and why it spread so quickly and so widely.
In the 1980s and early 1990, the United States had witnessed another crisis that saw 750 savings and loan associations (S&Ls) fail. S&Ls had specialised in accepting savings deposits and making residential mortgage loans. Deregulation in the 1980s allowed them to lend to increasingly risky borrowers who defaulted once the housing boom ended. The crisis remained confined to the S&Ls, however, with government successfully rescuing the depositors for just $125 billion in public money.
In contrast, the current crisis engulfed the entire globe largely because the proliferation of financial derivatives comprising the so-called "shadow financial economy" indirectly placed the risky mortgages on the balance sheets of financial institutions around the world. Defaults in the housing market impacted all holding these derivatives.