Thoughts on the Financial Crisis

ISLAMICA:In July 2007, two hedge funds operated by the investment banking firm Bear Stearns declared bankruptcy. At that time very few people probably thought much of it: after all, investment vehicles lose money all the time, so why would this signify anything different? With hindsight, however, it turns out that July 2007 marked the end of the credit bubble that stood behind the real estate bubble in the United States. Once that bubble was pricked, the real estate bubble also popped. Once the real estate bubble popped, it turned out that much of the growth in the US and even the world economy had become addicted to the continued appreciation in US home prices. How could this be the case? Well, it turns out that these three bubbles—credit, home prices and US consumption—had all become self-reinforcing...Read More