>> The crisis happened because the fundamentals of the securities
>> (the mortgage-backed securities) were defective.
>
> Of all the issues involved in this highly complex subject, I think I
> can state categorically that this one is incorrect. Mortgage-backed
> securities are not to blame in this, even in the slightest. MBS (and
> more generally CDO) I think are uncontroversially a net win for banks
> and consumers alike.
Whether or not that's true, it's beside the point. I didn't say the existence of MBS caused the crisis. I said the crisis was caused by the use of faulty MBS (faulty due to bad loans and a bubble) as the main transaction medium for the wholesale banking system. When (some) MBS unexpectedly lost value, the transaction medium was suddenly no longer accepted. Consequently, interbank lending evaporated and there was a forced fire-sale of assets. It was a bank run. That is what explains....
> what happened in the 3rd and 4th quarters of 2008 to the credit
> markets, banks -- especially central banks -- and investment banking
> generally.
SA