The solution then adopted, which may, or may not, have eliminated or
reduced the problem, was to inject enormous amounts of money into the
system, to increase liquidity. The solutions to the insolvency problems
included the rescue of AIG, the world’s largest general insurance company
whose credit-default swaps underpinned the credit market, and the decision
to essentially guarantee the bad debt. In addition, the two largest
mortgage banks in the USA were effectively nationalized. Several banks
in Europe were rescued from bankruptcy and, to all intents and purposes,
nationalized. Again, in each of these cases, one can point to specific problems.
In the case of AIG, for example, the inadequate supervision by the
Office of Thrift Supervision is frequently mentioned as a part of the
explanation of the difficulties that the insurance company came to face.
Yet my main argument is that all the components of the crisis were highly
correlated and that it was the evolution of the system as a whole that led to
its downfall. To decompose it into its components and to seek individual
explanations for each of them, seems to miss the basic point. In any event,
the crisis has had global consequences and an important impact on the real
economy. Despite the concerted efforts of the major central banks and
governments, it is far from clear how long the consequences will las
The solution then adopted, which may, or may not, have eliminated orreduced the problem, was to inject enormous amounts of money into thesystem, to increase liquidity. The solutions to the insolvency problemsincluded the rescue of AIG, the world’s largest general insurance companywhose credit-default swaps underpinned the credit market, and the decisionto essentially guarantee the bad debt. In addition, the two largestmortgage banks in the USA were effectively nationalized. Several banksin Europe were rescued from bankruptcy and, to all intents and purposes,nationalized. Again, in each of these cases, one can point to specific problems.In the case of AIG, for example, the inadequate supervision by theOffice of Thrift Supervision is frequently mentioned as a part of theexplanation of the difficulties that the insurance company came to face.Yet my main argument is that all the components of the crisis were highlycorrelated and that it was the evolution of the system as a whole that led toits downfall. To decompose it into its components and to seek individualexplanations for each of them, seems to miss the basic point. In any event,the crisis has had global consequences and an important impact on the realeconomy. Despite the concerted efforts of the major central banks andgovernments, it is far from clear how long the consequences will las
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