Trigger Finger

It’s been widely assumed that the financial crisis spread from the United States to the rest of the world because foreign institutions held dangerous amounts of Wall Street’s sub-prime mortgage paper. But a startling paper by Federal Reserve Board economists Steven B. Kamin and Laurie Pounder DeMarco concludes the contagion was indirect – that the collapse of the U.S. housing market was the trigger, not the cause, of the global meltdown. They put the blame on some (other) sources of bank instability: “the opacity of their balance sheets; excessive dependence on short-term funding; vicious cycles of mark-to-market losses driving fire sales of MBS; the realization that financial firms around the world were pursuing similar (flawed) business models; and global swings in risk aversion.”