The Current Financial Crisis and the Origins of Excessive Liquidity

Philip Arestis and Elias Karakitsos

Chapter 3 in The Post ‘Great Recession’ US Economy, 2010, pp 41-57 from Palgrave Macmillan

Abstract: Abstract The prevalent view is that the current credit crisis has its origin in the bursting of the housing bubble. But what is missing from this view is that the financing of a bubble is only possible through a corresponding increase in credit — no credit, no bubble (see Karakitsos, 2008). Thus at the heart of the current woes lies the excessive liquidity that had been put in place in the last ten years or so.2 This liquidity financed in the first instance the internet bubble, but because there was no deleverage following the bursting of this bubble the liquidity went on to finance other bubbles, including housing, private equity and commodities. Thus, the housing bubble is a transformation of the previous internet bubble.

Keywords: Monetary Policy; Central Bank; Private Equity; Great Recession; Credit Spread (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1057/9780230276109_3

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