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In brief: The demand side did it

University of Oregon professor Mark Thoma believes the cause of the financial panic in 2007-2008 is likely to lie with the demand side of the market, more than the supply side.

So does International Monetary Fund economist Zoltan Pozsar.

So does RepoWatch.

What does this mean?

Placing the blame on the demand side, instead of the supply side, places the blame on the investors – including commercial and investment banks – more than on the lenders and borrowers. It says the demand for lucrative investments drove the housing securitization bubble, and the fleeing of spooked investors in 2007 and 2008 caused the panic and crash.

That flight revealed itself as runs on the repurchase market, asset-backed commercial paper, securities lending, commercial paper, money market funds, prime brokers and bank deposits.

A focus on the demand side says we won’t prevent another crisis by fixing mortgages, because next time the lousy investments will be something else. To prevent another crisis, we have to do something about those runs.

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