ABSTRACT
In 2007–2009 the world has seen the severest financial crisis since the Great Depression. The crisis erupted after years of lax monetary policy, financial deregulation, global imbalance, and financial innovation, which made more households and entrepreneurs accessible to cheap credit and share the prosperity of the Great Moderation, while the financial institutions more exposed to each other and vulnerable to aggregate shocks. The crisis started from the bursting of housing bubbles, liquidity dried up nearly completely as a response to doubts about the quality of subprime mortgage-backed securities. Despite massive central bank interventions, the liquidity freeze did not melt away, but rather spread slowly to other markets such as those for auction rate bonds, commercial paper, and money market mutual funds. At its peak, the collapse of big financial giants such as Lehman Brothers and American International Group (AIG) brought the global financial market into a systemic meltdown, and the bailout effort cost the taxpayers hundreds of billions of dollars. In the beginning of 2010, when the world economy just started to see some signs of recovery, several European economies slipped into another quagmire of public debt crisis. From the numerous US foreclosed homes to the nearly bankrupted arctic Norwegian towns, the mess left by the crisis needs to be cleaned up for many years to come.
