“Essentially Identical”

From Scott Sumner:

Consider the following:

Banks pour huge amounts of money into one particular asset class. They are encouraged to do this by public policymakers, although there is some dispute about whether that was the main reason for their decisions. These assets have a long tradition of doing well, although a close look at the evidence would have raised red flags. The asset market in question suddenly takes a big dive as default risk increases sharply. This drags down many large banks, forcing policymakers to provide assistance.

What have I just described? The sub-prime fiasco or the PIGS sovereign debt fiasco? I’d say both. I’d say these two crises are essentially identical. (I should clarify that by “essentially identical” I mean in essence, not in every detail.)

Posted by on December 5th, 2011 at 4:14 pm


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