Sucker Punched by the Invisible Hand

Neil Fligstein and Adam Goldstein

Institute for Research on Labor and Employment, Working Paper Series from Institute of Industrial Relations, UC Berkeley

Abstract: The worldwide financial crisis of 2007-2010 was set off by the collapse of the subprime mortgage market in the U.S. This crisis caused widespread banking failure in the U.S. and forced the federal government to provide a massive bailout to the financial sector. The crisis simultaneously reverberated to banks around the world, and eventually brought about a worldwide recession. This paper documents why Western European countries were so susceptible to the housing price downturn. We explore various mechanisms by which the financial crisis might have spread including the existence of similar regulatory schemes, government deficits and current account imbalances, export connectedness, and the presence of a housing bubble. We present a surprising result: European banks went down because they had joined the market in the U.S. for mortgage backed securities and funded them by borrowing in the asset backed commercial paper market. They were pursuing the same strategies to make profit as the American banks, and when the housing market turned down, they suffered the same fate as their U.S. counterparts. Our study makes a broader theoretical point suggesting that subsequent studies of global finance and financial markets need to know something about the identities and strategies of the banks that structure the main markets for different products. This insight has implications for the literatures on financialization, globalization, and the sociology of finance.

Keywords: Social and Behavioral Sciences; Worldwide Financial Crisis of 2007-2010 (search for similar items in EconPapers)
Date: 2012-09-03
New Economics Papers: this item is included in nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.escholarship.org/uc/item/1754s7tz.pdf;origin=repeccitec (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cdl:indrel:qt1754s7tz

Access Statistics for this paper

More papers in Institute for Research on Labor and Employment, Working Paper Series from Institute of Industrial Relations, UC Berkeley Contact information at EDIRC.
Bibliographic data for series maintained by Lisa Schiff ().