Number: RL34182
Title: Financial Crisis? The Liquidity Crunch of August 2007
Authors: Darryl E. Getter, Mark Jickling, Marc Labonte, and Edward V. Murphy, Government and Finance Division 
Abstract: The financial volatility observed in August is particularly significant because it illustrates how stress in one financial market - in this case, housing - may spread to other markets, causing losses to investors and intermediaries not directly involved in the market where the trouble originated. These events raise questions about the ability of policymakers to respond to financial crises since an increasing share of credit market activity now occurs outside the banking system, in unregulated institutions such as nonbank mortgage lenders and hedge funds. This report describes the preceding events that instigated the August 2007 liquidity crunch, followed by the major events that occurred during the crunch. It then analyzes the structure of financial markets today to identify underlying causes for the crunch. It ends by analyzing policy issues raised by the liquidity crunch relating to macroeconomic stabilization policy and financial regulation.
Pages: 23
Date: September 21, 2007