Understanding the global financial crisis

The financial meltdown 2007-08 was a vast and complex event that many analysts are still trying to decipher. The purpose of this paper is to impart an understanding of the global financial crisis with a sharp focus on informed conjectures. To this end, the paper first provides a picture in the large of the financial turmoil 2007-08, and then, singles out contributing factors to the crisis (such as sub-prime mortgages, excessive risk-taking and securitization) which taken in isolation could not possibly explain the collapse of the financial system. The main claims of this paper are the following two. First, no complete understanding of the financial crisis 2007-08 is possible without a thorough comprehension of the interactions among three mutually reinforcing financial innovations, namely: sub-prime mortgage, securitization and re-securitization. Second, the catastrophic financial collapse in October 2008 happened because re-securitization engendered pervasive Knightian uncertainty.