I couldn’t figure it out. Even with reading news reports, financial articles, and explanation from my dad (a financial planner at Morgan Stanley) I had little idea how a US housing bubble could cause a global financial collapse. Eventually, with enough research (mostly through Michael Lewis’s excellent The Big Short) I learned of the housing derivative bubble and something called liquid capital. I was fascinated how an American housing crisis could lead to economic devastation in Greece, Iceland, and even Spain. With a global economic system capital flows freely across thousands of miles and international borders. This free flowing capital is part of what keeps the economy afloat, enabling companies to borrow money freely to help fund operations. However, with the rise of derivatives and loan packages, capital was concentrated in fixed assets. When the assets went sour (the US housing bubble) liquid capital dried up and the global financial system struggled. Banks stopped lending and many businesses were unable to operate. The fixed assets were the problem, but globalization made an American bubble a global problem.
