All lessonsCrisis Architecture & The Global Dollar
The Doom Loop
Banks hold their government’s bonds; the government stands behind the banks.
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Put these in order
Trace the loop from a sovereign scare to a credit crunch.
Earliest cause at the top
Domestic banks take losses on the bonds they hold
Their largest single exposure is usually their own sovereign
Doubts about the government push its bond prices down
Yields rise on a deficit or a political shock
Their capital falls and they cut lending
Less capital means fewer loans they are permitted to make
The fiscal position deteriorates further
Which was the original worry — now with evidence
The economy weakens and tax revenue falls
The credit crunch is felt by firms with nothing to do with bonds
Answer to continue.