Risky assets do not cause crises. It is those perceived as being safe that do.
Such a statement might sound counter-intuitive. However, it reveals much about the current crisis as well as the recent past. The subprime crisis of 2007-08 was exacerbated by the fact that so many of the mortgage-backed securities spewed out by banks were rated triple A. That meant they could essentiallybe considered ‘risk-free’ for banks, when, of course, they were anything but.
“Follow the money” might have been the mantra for Bob Woodward and Carl Bernstein in investigating the Watergate scandal. But “follow the debt” would be a better way of summing up where investors should be looking for the next bubble.
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