By the second half of 2007, that belief began to unravel in the face of incoming data. People were learning the hard way that U.S. land was a risky investment. Now the only question was how risky. That uncertainty planted the seeds for global financial panic. What do I mean by the term “financial panic”?
Financial panics are events that blur the line between liquidity and solvency. A firm is solvent if its revenues (in a discounted presentvalue sense) exceed its expenditures. A firm is liquid if it is able to raise enough funds – either by borrowing or by selling assets – to pay its current costs.