Financial System Stability and Market Confidence.

This paper first explains why the financial crisis of 2007-08 started in the United States, in particular, in the sub-prime mortgage market, a periphery of their financial markets. Agency problems in complex securitization and investors' "responsibility avoidance" behavior are argued to be key factors in the sub-prime mortgage meltdown. It then examines the collapse of global financial markets and the erosion of market confidence that followed, and measures taken by governments and central banks to save the financial system. Finally, the paper explores possible safety nets that may prevent another financial crisis: private-sector capital insurance, public--private partnership capital insurance (a version of catastrophe insurance), and contingent capital. [ABSTRACT FROM AUTHOR]

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