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Dissecting the global financial crisis

Martin Wolf offers a masterly post-mortem of the Great Recession and after

Published Wed, Nov 26, 2014 · 09:50 PM

DURING an interview with me in June 2007 (published in BT on July 7), Timothy Geithner, then chief of the New York Fed, which regulates Wall Street banks, didn't seem to have a clue that a financial crisis was around the corner. Responding to a question on whether so-called financial innovations such as collateralised debt obligations (CDOs) may be dangerous because of their complexity and opaqueness, he said: "The combined effect of these innovations probably makes crises less probable."

He also suggested that "it's very unlikely that we'll face again the sort of circumstances that led to the opportunity for collective action that LTCM presented", referring to the bailout of the troubled hedge fund Long Term Capital Management in 1998. In other words, all seemed well and good.

A little over a month after Mr Geithner spoke, the early contours of the global financial crisis came into view. In early August 2007, faced with a wave of redemptions, BNP Paribas announced it could no longer refund investors in three of its investment funds. On Aug 9, the European Central Bank (ECB) was forced to inject 95.8 billion euros (S$155.2 billion) into the markets to calm jittery investors. On Sept 13, the British mortgage bank Northern Rock suffered the first big depositor run since the 19th century. A string of other financial disasters were to follow, one after the other, all the way into 2009.

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