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the 2007 crisis wasn't caused by debt. it was caused by huge structures of derivatives based on that debt.
by metalliqaz 6y ago
the 2007 crisis wasn't caused by debt. it was caused by huge structures of derivatives based on that debt.
- imnotlost 6y agoObviously a lot of that debt couldn't be serviced and a lot of it was extended to people who just couldn't afford it. The derivatives were a multiplier.
- metalliqaz 6y agoyeah a multiplier, so instead of a steep correction in the housing market, there was a global financial meltdown
- oconnor663 6y agoThis isn't my field, so I should be clear that I'm making stuff up based on podcasts I've listened to :) The way I understand it is that things like MBS's and CDS's were the low-level details of that specific crisis, which we might not expect to happen again in exactly the same way. But the high-level picture was that the failure of major institutions had ripple effects that both 1) directly caused other institutions to fail and 2) indirectly created a lot of uncertainty about who might fail next. Importantly, (2) can cause more failures, by freezing up the markets that a lot of businesses depend on for everyday transactions. This cycle between (1) and (2) can be a general effect, that we might expect to see again in future crises, regardless of what specific low-level details set it off.
- imtringued 6y agoIt was caused by banks irresponsibly handing out debt and individual investors betting against that debt.