Markus Brunnermeier provides an excellent summary graph of the financial crisis, told in “spreads”.
Figure 3 from Brunnermeier (2008): Interest Rate Spreads. The top panel shows the LIBOR-OIS spread (dark shaded area). The TED spread (LIBOR minus the Treasury bill rate) is given by the sum of two shaded areas. It also captures the fact that Treasury bonds are especially sought-after collateral in times of crisis. The top panel also shows the ABCP rate minus OIS spread, while the lower panel depicts the spread between mortgage backed repos and general collateral repos and the agency spread. Sources: Bloomberg, LehmanLive, and Federal Reserve Board.
An increase in mortgage delinquencies due to a nationwide decline in housing prices was the trigger for a full-blown liquidity crisis that emerged in 2007 and might well drag on over the next years. While each crisis has its own specificities, the current one has been surprisingly close to a “classical banking crisis”. What is new about this crisis is the extent of securitization, which led to an opaque web of interconnected obligations. This paper outlined several amplification mechanisms that help explain the causes of the financial turmoil. These mechanisms also form a natural point from which to start thinking about a new financial architecture. For example, fire-sale externalities and network effects suggest that financial institutions have an individual incentive to take on too much leverage, to have excessive mismatch in asset-liability maturities, and to be too 36
interconnected. Brunnermeier (2008b) discusses the possible direction of future financial regulation using measures of risk that take these domino effects into account.
(As an aside, I’ll observe that in this paper, Fannie and Freddie do not make appearances as “causes” of the crisis. I wonder who has an interest in pushing the view of Fannie and Freddie as betes noire. For more recent critiques of the “F&F caused it” meme, see ,  (h/t DeLong).)