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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 20: Mounting risks of the continuing debt bubble in the new millennium

Jane D’Arista

Extract

The multifaceted risks embedded in the debt bubble and housing boom raised questions about the role of central banks in targeting asset prices. Chairman Greenspan argued that such efforts would be ineffectual and, on the subject of rising debt, he argued that low interest rates made it possible for households to carry more debt. The Fed did not address evidence that, as household debt continued to rise in the five years before the crisis, high-income families were less affected while families with less wealth and rising debt-service payments became more vulnerable. In addition, the Fed continued to ignore the degree to which the availability of US credit depended on the support of foreign capital inflows.

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