The debt crisis: seven questions

We are living through the first crisis of our brave new world of securitised financial markets. It is too early to tell how economically important this upheaval will prove. But nobody can doubt its significance for the financial system. Its origins lie with credit expansion and financial innovation in the US itself. It cannot be blamed on “crony capitalism” in peripheral economies, but rather on irresponsibility in the core of the world economy.

What has happened raises important questions. Here are seven.

First, why did this crisis start in the US? The answer is: “The borrowing, stupid”. Default on debt – actual and feared – always drives big financial crises because creditors think that they ought to be repaid. US households were the world economy’s most important net borrowers in the mid-2000s, replacing the emerging markets of the 1990s.

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