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All Fall Down

Debt, Deregulation and Financial Crises

Jane D’Arista

All Fall Down traces the ways in which changes in financial structure and regulation eroded monetary control and led to historically high levels of debt relative to GDP in both developed and emerging economies. Rising stocks of debt drove the global financial system into crisis in 2008 when households, businesses, financial institutions and the public sector in some countries strained to generate sufficient income for debt service. The stagnation and fall in asset prices that followed began the process of unwinding that led to a run on the financial sector by the financial sector.
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Chapter 7: Weaving the web of interconnectedness

Jane D’Arista

Extract

Interconnectedness grew out of reliance on borrowing from and lending to other financial institutions, the primary channel for funding in offshore markets that migrated to the US market in the 1990s and resulted in growth in the financial sector as a share of GDP. Expansion of the market for repurchase agreements (repos) facilitated pyramiding as borrowing backed by one financial asset to buy another pushed up leverage and increased indebtedness within the financial sector. The repo market was the center of the loss of confidence in 2008 as it forced unwinding of positions and led to a run on the financial sector by the financial sector.

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