Why did Northern Rock collapse?
Not directly because people couldn’t meet their mortgage payments, but because of the knock-on effects from the US mortgage bubble bursting. Those knock-on effects are as wide-ranging and unpredictable as they are because of the dramatic, historic expansion and restructuring of global financial markets in the last two decades or so. The rich do a lot more trading of bits of paper representing (ultimately) entitlements to future profits or interest payments than they used to, and they do it more globally. The ratio of global financial assets to annual world output rose from 109% in 1980 to 316% in 2005 (and 405% in the USA). The processes are more complicated and opaque. A new sort of bit of paper, called “credit derivatives”, has expanded from zero ten years ago to $26 trillion today. The mortgage lenders do not just hold on to your mortgage agreement and wait for your repayments. They convert a bundle of mortgage agreements into a “financial asset” and sell it on, thus getting their c
