ABSTRACT
The events in the stock market are reminders that these interconnections between flow and asset markets are not confined to natural resources. When new assets were defined based on the interest income from home mortgages, the prices (and risks) attributed to these securities relied on the returns that follow from ability of borrowers to continue servicing their mortgages as well as the value of the assets (e.g. the homes) providing collateral for the debt. A complex web of other derivatives was defined from this simple structure. The bottom line for our purposes is a multiplicity of interconnections between asset and flow markets. These linkages can be either stabilizing, or in today’s world, destabilizing influences. Shocks to the housing market, a lynchpin to the tiered structure of ‘engineered’ assets, caused updating in the perceived risks embedded in the system. Markets spread the effects quickly as we have seen.
