The Subprime crisis - another contagion case study

Below is a short presentation that summarizes key aspects of the Subprime crisis - factors causing and contributing to the bubble, and what happened in the aftermath of this #bubble.

Bubble spotting - Sub-prime crisis / Housing bubble 2007-2008 from Benjamin Van As

The Subprime crisis (for at least the second time in recent history - the other being the Asia debt and currency crisis in 1997), showed the massively devastating effect that contagion can have on the financial markets on a global basis.  Whilst the crisis (at least on the surface) appeared to have its original in one market (being a specific portion of the residential housing market), it quickly proved that it was not an isolated problem, as the problem spread into various other local and international investment markets.  

Due to the increasing complexity of financial instruments these days, as well as the interwoven nature of markets and international cross-border transactions, going forward it is safe to say that it will become more and more difficult to isolate a sick patient (market experiencing a bubble) in time to prevent loss of money. 

Furthermore the current electronic age is aiding and abetting in both the ease as well as speed of transmission (infection).  The fall and or crash of a specific market on one side of the world will within minutes or seconds cause a ripple effect and spread to other markets. And one cannot stop this by quickly unplugging the computer after hearing the lightning strike or seeing the flash.

The risk of contagion will therefore in all likelihood pose very unique challenges in the financial world going forward.  One could argue that, as a minimum, the nature and extent of due diligence required prior to making any kind of future investment decision, would require some serious consideration. But not only this -  political as well as financial policy formulation can perhaps do with some rethinking as well. There seems to be not enough consideration or understanding of the potential cause and effect of proposed strategies or policies these days. And general ignorance about Newton's Laws. The words "unintended consequences" and "collateral damage" have become meaningless and empty rhetoric, used by those who have little intention of taking any responsibility for their decisions. 


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