That uncertainty translated into uncertainty about the ultimate solvency of institutions holding those assets – and the ultimate solvency of any of those institutions’ creditors and their creditors and so on. Spreads in credit markets between Treasury returns and other bond returns began to widen – at first slightly and then alarmingly. The financial crisis of 2007-09 was under way.
Thus far, I’ve described how the fall in land prices that began in 2006 triggered the recent global financial crisis. I now move to my second point: Higher amounts of household and financial institution leverage mean that the financial system is more susceptible to these kinds of shocks. To understand my argument, it is best to consider an example.