Sunday, January 13, 2008

Root cause of financial crisis of 2007

Brad Setser pegs it very succinctly as follows: "the recent mis-allocation of global savings into US real estate." He says this in the context of a piece on two researchers who
"compare the crisis in the US banking system -- and in the shadow banking system, which turned out to be rather linked to the real banking system -- triggered by the subprime crisis to other recent crises in advanced economies. They find "stunning qualitative and quantitative parallels across a number of standard financial crisis indicators.""
Calculated Risk today has a good piece titled "Cuomo: Due Diligence and Disclosure" which discusses how the securitization system for issuing home loans AKA the shadow banking system, has led to the misallocation of capital that Setser is describing.

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