Financial Bubbles, Real Estate bubbles, Derivative Bubbles, and the Financial and Economic Crisis

D. Sornette () and R. Woodard

No CCSS-09-003, Working Papers from ETH Zurich, Chair of Systems Design

Abstract: The financial crisis of 2008, which started with an initially well-defined epicenter focused on mortgage backed securities (MBS), has been cascading into a global economic recession, whose increasing severity and uncertain duration has led and is continuing to lead to massive losses and damage for billions of people. Heavy central bank interventions and government spending programs have been launched worldwide and especially in the USA and Europe, with the hope to unfreeze credit and boltster consumption. Here, we present evidence and articulate a general framework that allows one to diagnose the fundamental cause of the unfolding financial and economic crisis: the accumulation of several bubbles and their interplay and mutual reinforcement has led to an illusion of a ``perpetual money machine'' allowing financial institutions to extract wealth from an unsustainable artificial process. Taking stock of this diagnostic, we conclude that many of the interventions to address the so-called liquidity crisis and to encourage more consumption are ill-advised and even dangerous, given that precautionary reserves were not accumulated in the ``good times'' but that huge liabilities were. The most ``interesting'' present times constitute unique opportunities but also great challenges, for which we offer a few recommendations.

Keywords: Financial crisis; bubbles; real estate bubble; derivatives; super-exponential (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

Downloads: (external link)
ftp://web.sg.ethz.ch/RePEc/stz/wpaper/pdf/CCSS-09-003.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Failed to connect to FTP server web.sg.ethz.ch: A connection attempt failed because the connected party did not properly respond after a period of time, or established connection failed because connected host has failed to respond.

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:stz:wpaper:ccss-09-003

Access Statistics for this paper

More papers in Working Papers from ETH Zurich, Chair of Systems Design Contact information at EDIRC.
Bibliographic data for series maintained by Claudio J. Tessone ( this e-mail address is bad, please contact ).