Monday, March 31, 2008

Averting Financial Crisis
"There is no precise definition of “financial crisis,” but a common view is that
disruptions in financial markets rise to the level of a crisis when the flow of credit to households and businesses is constrained and the real economy of goods and services is adversely affected. Since mid-2007, central bankers — including the Federal Reserve — have labored to keep the downturn in U.S. subprime housing from
developing into such a crisis.

While subprime problems were widely anticipated, the subsequent spread of
turmoil into many seemingly unrelated parts of the global financial system was not.
Many losses occurring in diverse firms and markets — often quite severe — have
features in common: the use of complex, hard-to-value financial instruments; large
speculative positions underwritten by borrowed funds, or leverage; and the use of
off-the-books entities to remove risky trading activities from the balance sheets of
major financial institutions."

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