Lost Trust: The Real Cause of the Financial Meltdown

In this paper, Bruce Yandle,  Professor of Economics Emeritus, Clemson University and Distinguished Adjunct Professor of Economics, Mercatus Center at George Mason University, addresses the issue of

One distinguishable feature of the current financial crisis from other crises is that global credit markets, including U.S. markets came to a near stop. This problem was not due to bank runs akin to the 1933 great depression or a lack of liquidity, as has been the case in other panics. The current crisis may likely be the only one that resulted from a sudden loss of trust. Although central bankers and governments can work to implement policies to resuscitate credit markets, a more arduous task is rekindling trust. Discussing how trust evolves in the formation of markets, this paper chronicles the elements and events that led to the financial collapse of 2007–2009.