Very, very, very, very smart: Brad Setser: Three Sudden Stops and a Surge: "Fundamentally, the crisis was a crisis of confidence in the health of the balance sheets of the great financial houses of the United States and Europe.... The line between banks and shadow banks was thin, it turned out...
...Think of it this way: The marginal borrower who needed financing was a U.S. household taking out a home equity line of credit. And the global creditor willing to buy dollar assets and finance the U.S. external deficit was an Asian (or Gulf) central bank resisting the appreciation of their own currency. But central banks, by and large, didn’t want to take the risk of lending to U.S. households.... The huge gross flows—the big bank inflows and outflows in others, the large corporate bond purchases—in the run up to the U.S. crisis were the visible traces that these complex chains of financial intermediation left in the balance of payments data. There was a signal there. And that signal was, by and large, missed. The conventional wisdom at the time was that these large flows indicated that a global financial system was dispersing the risk associated with funding the U.S. housing bubble globally, reducing the risk any correction posed to the U.S. financial system. We learned the hard way that wasn’t really true. The complicated chains of financial intermediation needed to use in some deep sense central bank money to fund subprime mortgages were actually quite fragile. And the weakest link in the chain was the ability and willingness of private investors to take credit risk....
Note: This initially started in part as a review of Adam Tooze's Crashed. But I quickly realized it wasn't much of a review. Probably because I lack the necessary distance from the events (and or at least the flows) described in his book. Crashed is by far the best account of the "transatlantic" angle of the 2008 banking and credit crisis that I have read: it fully deserves all the accolades it has received...
#shouldread
#globalization
#finance
