Working Paper: NBER ID: w14612
Authors: Markus K. Brunnermeier
Abstract: This paper summarizes and explains the main events of the liquidity and credit crunch in 2007-08. Starting with the trends leading up to the crisis, I explain how these events unfolded and how four different amplification mechanisms magnified losses in the mortgage market into large dislocations and turmoil in financial markets.
Keywords: liquidity; credit crunch; financial crisis; mortgage market; securitization
JEL Codes: E4; E5; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Borrowers' balance sheet effects (G21) | liquidity spirals (E44) |
| liquidity spirals (E44) | eroded capital for financial institutions (F65) |
| liquidity spirals (E44) | tightened lending standards (G21) |
| tightened lending standards (G21) | push down prices (D41) |
| tightened lending standards (G21) | tighten funding further (H60) |
| Banks hoarding funds (G21) | drying up of the lending channel (F65) |
| Runs on financial institutions (G21) | erosion of bank capital (F65) |
| Network effects (D85) | gridlock due to counterparty credit risks (E44) |