If these risks are truly spread among the institutional investors and other direct investors, it should not be so hard for an economy as large as the U.S. to absorb the losses (all the more so given some of the burden will fall on Europe, Japan and even, to a much less extent, China). So why, against most expectations, did this turbulence continue spreading?
An understanding lies in the fact that while some of the investment risk was carried by direct investors, certain risks were in fact left within the indirect financing channels. As we know, these are the so-called structured investment vehicles (SIVs), which are often off-balance-sheets of banks and other financial institutions.