Discussion Paper

No. 2008-43 | December 18, 2008
Stages of the 2007/2008 Global Financial Crisis: Is There a Wandering Asset-Price Bubble?


This study identifies five distinctive stages of the current global financial crisis: the meltdown of the subprime mortgage market; spillovers into broader credit market; the liquidity crisis epitomized by the fallout of Northern Rock, Bear Stearns and Lehman Brothers with counterparty risk effects on other financial institutions; the commodity price bubble, and the ultimate demise of investment banking in the U.S. The study argues that the severity of the crisis is influenced strongly by changeable allocations of global savings coupled with excessive credit creation, which lead to over-pricing of varied types of assets. The study calls such process a “wandering asset-price bubble”. Unstable allocations elevate market, credit and liquidity risks. Monetary policy responses aimed at stabilizing financial markets are proposed.

Paper submitted to the special issue “Learning from the Financial Crisis

JEL Classification:

G12, G15, G21, G24



Cite As

Lucjan T. Orlowski (2008). Stages of the 2007/2008 Global Financial Crisis: Is There a Wandering Asset-Price Bubble? Economics Discussion Papers, No 2008-43, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2008-43

Comments and Questions

Blake Goud - Citigroup?
December 25, 2008 - 07:27

You argue that "greater consolidation should occur within the banking sector because universal banks have fared far better than investment banks like Lehman Brothers and regional banks/savings & loans with fairly narrow focuses like Washington Mutual. One bank which you didn't mention that bucks the trend is Citigroup. ...[more]

... That financial group is a conglomerate spanning many different areas of banking which by your conclusion should have fared better yet was the final (or most recent) financial institution in the U.S. that needed to be rescued. Is this due to its unique characteristics or does it reflect the continued vulnerability of even universal banks to an crisis with rising volatility?

You question the wisdom of government bailouts of troubled financial institutions based on the moral hazard it creates. However, in a rapidly developing crisis where venerable banks are facing runs and collapse, what should the optimal response be? The experience of 'allowing' Lehman Brothers to fail did not work out well and triggered even greater volatility.

Thank you. I found the paper quite informative in putting the varying stages of crisis into a logical framework.

Lucjan T Orlowski - Reply to comment by Blake Goud
February 18, 2009 - 15:08

Thank you for your comment. Citigroup constitutes a special case and you are right on target to call it a conglomerate. It went beyond a concept of universal banking in creating a “financial supermarket” that has proven to be unsustainable. It is probably feasible to devise a prudent company-level ...[more]

... risk management scheme for a universal bank with some level of focus; but it seems entirely implausible to do so for a financial conglomerate with large international presence as was the Citigroup’s strategic concept.

As to the bailout, unfortunately, there is not enough underlying concept or logic that can be applied to responding to a crisis of such global scale, intensity and complexity as the one we are currently experiencing. It seems that allowing Lehman to fail was imprudent in relation to the treatment of other of other distressed institutions. Clearly more analytical work and strategic efforts toward devising orderly bailouts are urgently needed.

Thanks again.

Anonymous - Referee Report
January 23, 2009 - 11:19

see attached file