The Crisis in Bullet Points

How did this crisis happen? How could men earning tens of millions end up losing tens of billions? How could a Republican administration end up nationalizing the federal National Mortgage Association, the Federal home Loan Mortgage Corporation and the insurance giant, American International Group? Above all, how could a crisis in the American mortgage market precipitate not just an American recession but quite possibly a world depression? To answer these questions you need to understand at least six distinct though interrelated financial phenomena:

1. How so many American and European banks came to have such highly leverage balance sheets, in other worlds how they ended up owing and lending so much more money than their underlying capital bases;

2. How a whole range of different kinds of debt, including mortgage debt as well as credit card debt, came to be "securitized", or bundled together and then sliced up into different kinds of bond-like securities;

3. How the monetary policies of central banks came to be focuses on a very narrow definition of inflation, ignoring the potential hazards of bubbles in stock prices and later real estate prices;

4. How the insurance industry, led by the giant American firm AIG, branched out of traditional risk coverage into the market for derivatives, effectively selling protection against highly uncertain financial risks;

5. Why politicians on both sides of the Atlantic sought to increase the percentage of households that owned their own homes using a variety of inducements to widen mortgage markets;

6. What persuaded Asian governments, and particularly that of the People's Republic of China, that they should help to finance the US current account deficit by accumulating trillions of dollars in international reserves.

Recommend: The Ascent of Money, A Financial History of the World by Niall Ferguson