In the testimony of William M Isaac before the US sub-committee on Capital Markets, Insurance and Government Sponsored Enterprises dated March 12, 2009 it was pointed out that “…MtM losses destroyed $ 500 billion of capital in the financial system. Because banks can lend 10 times of capital, MtM losses destroyed $ 5 trillion of lending capacity”, leading to a severe credit squeeze.
The sub-prime crisis, thus, had all the ingredients to deliver a serious global recession. From financial crisis to a synchronised global recession In view of the strong interactions between the financial system and the real economy, a financial crisis often gives rise to an “adverse feedback loop”.