Journal of Economic Perspectives: Vol. 23 No. 1 (Winter 2009)


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Deciphering the Liquidity and Credit Crunch 2007-2008

Article Citation

Brunnermeier, Markus K. 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008." Journal of Economic Perspectives, 23(1): 77-100.

DOI: 10.1257/jep.23.1.77


The financial market turmoil in 2007 and 2008 has led to the most severe financial crisis since the Great Depression and threatens to have large repercussions on the real economy. The bursting of the housing bubble forced banks to write down several hundred billion dollars in bad loans caused by mortgage delinquencies. At the same time, the stock market capitalization of the major banks declined by more than twice as much. While the overall mortgage losses are large on an absolute scale, they are still relatively modest compared to the $8 trillion of U.S. stock market wealth lost between October 2007, when the stock market reached an all-time high, and October 2008. This paper attempts to explain the economic mechanisms that caused losses in the mortgage market to amplify into such large dislocations and turmoil in the financial markets, and describes common economic threads that explain the plethora of market declines, liquidity dry-ups, defaults, and bailouts that occurred after the crisis broke in summer 2007.

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Brunnermeier, Markus K. (Princeton U)

JEL Classifications

E32: Business Fluctuations; Cycles
E44: Financial Markets and the Macroeconomy
G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G28: Financial Institutions and Services: Government Policy and Regulation
G14: Information and Market Efficiency; Event Studies


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