The Subprime Turmoil
What's Old, What's New, and What's Next
Charles W. Calomiris | AEI Online
October 02, 2008
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We are currently experiencing a major shock to the financial system, initiated by problems in the subprime mortgage market, which spread to securitization products and credit markets more generally. Banks are being asked to increase the amount of risk that they absorb (by moving off-balance sheet assets onto their balance sheets), but losses that the banks have suffered limit their capacity to absorb those risky assets. The result is a reduction in aggregate risk capacity in the financial system--a bank credit crunch caused by a scarcity of equity capital in banks--as losses force those who are used to absorbing risk to have to limit those exposures.

This essay considers the origins of the subprime turmoil, and the way the financial system has responded to it. There are both old and new components in both the origins and the propagation of the subprime shock. . . .

Download file The full text of this article is available here as an Adobe Acrobat PDF.

Charles W. Calomiris is a visiting scholar at AEI.

About the Author

 

Charles W.
Calomiris
  • Charles W. Calomiris, who codirected AEI's Financial Deregulation Project until 2007, is concurrently the Henry Kaufman Professor of Financial Institutions at Columbia Business School. He is also a research associate at the National Bureau of Economic Research, a member of the Shadow Financial Regulatory Committee and the Financial Economists Roundtable, and the coordinator of the "Bank Performance and the Economy" program at the Center for Financial Research at the Federal Deposit Insurance Corporation. His research at AEI spans several areas, from banking and corporate finance to financial history and monetary economics. Mr. Calomiris also served on the 2000 International Financial Institution Advisory Commission. Known as the Meltzer Commission, this congressionally mandated group recommended specific reforms of the International Monetary Fund, the World Bank, the regional development banks, and the World Trade Organization to the U.S. government.
  • Phone: 2128548748
    Email: ccalomiris@aei.org
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