Causes and Mechanisms: The Crisis as a Debt Trap

Claudia Sanchez Bajo and Bruno Roelants

Chapter 2 in Capital and the Debt Trap, 2011, pp 45-78 from Palgrave Macmillan

Abstract: Abstract Departing from the ‘outer layer’ of shocking events, let us now delve further into the underlying causes and mechanisms at the root of the crisis. The precise causes of the financial breakdown remain surprisingly controversial.1 The very first reaction was one of astonishment at the appearance of an unexpected ‘black swan’.2 For others, it was the thing about to happen. Most explanations have dealt with household-mortgage defaults and shadow banking in their operations of the sub-prime market and their role in initiating the crisis.3 What is certain is that too many loans were granted without considering the capability to pay back the debt thus created, and that it happened thanks to the inventive use of financial products that were believed to be secure. But behind these well-known events, debates rage about the main causes: were they monetary or institutional, the product of individual misbehaviour or systemically endogenous? Was the crisis due to a liquidity problem, a credit crunch or a debt trap?

Keywords: Interest Rate; Monetary Policy; Credit Default Swap; International Financial Reporting Standard; Credit Crunch (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-30852-7_3

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DOI: 10.1057/9780230308527_3

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