Debt Overhang
Understanding The Birth of A Crisis
“With parsimony a little is sufficient; and without it nothing is sufficient; whereas frugality makes a poor man rich” — Lucius Annaeus Seneca
The world is on the hunt for the next financial crisis. Perhaps, not wrongfully. It seems like Black Swan events occur so frequently there is nothing outrageous in the world today. Truth has far outpaced fiction in terms of its strangeness. The 2008 subprime mortgage crisis in the United States woke up the world to the possibility of a local epidemic becoming a global contagion capable of effectively shutting down countries in a heartbeat. There are various conjectures about the origin of the next financial crisis. It could be student loans or perhaps something bigger — a sovereign public debt default.
Before the 2008 crisis, the world did not truly understand the interconnected nature of economies. Globalization forged strong economic connections between economies and derivative instruments such as Credit Default Swaps (CDS’s) and Mortgage Backed Securities (MBS’s) helped make those connections riskier. These instruments were originally designed to bring liquidity into the banking system. Today, Lewis Ranieri-the creator of MBS’s laments the role his creation played in…
