!VAR HAGENDOORN

Interview With Ricardo Caballero

An interview with Ricardo Caballero conducted by The Region, a magazine published by the Federal Reserve Bank of Minneapolis. He argues, convincingly in my view, that one of the causes of the recent financial crisis lies in the fact that the demand for AAA-rated assets is greater than the supply. In the years before the crisis of 2007/08 this demand was met by the creation of asset backed securities. In the years since the financial crisis the supply of asset backed securities has fallen considerably, but the demand for AAA-rated assets has not abated. So how has this demand been met? By the supply of sovereign debt... which explains the current crisis...

Ricardo Caballero's homepage at MIT.

Update: I've added the chart below from a recent report by the Joint Forum of the BIS and the Basel Committee, Report on asset securitisation incentives which says it all.