When Lehman Brothers collapsed, no one knew which bank would be next. Counterparties lost faith in all measures of the soundness of banks. Under such a scenario, the only course of action that made sense was to hold one's money close to the chest. This individually rational response was collectively disastrous. The uncertainty around the size and distribution of potential losses led to systemic collapse.
Something similar has been unfolding in the Eurozone banking and sovereign debt cri...
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