I thought it was by the layers upon layers of interconnected unregulated derivatives valued at a few orders of magnitude above the underlying subprime mortgages given to anyone with a pulse.

> it was by the layers upon layers of interconnected unregulated derivatives valued at a few orders of magnitude above the underlying subprime mortgages given to anyone with a pulse

It was interconnected derivatives and structured products linked to banks that caused a liquidity crisis in the former to cause a crisis of confidence in the latter.

Meanwhile: "In the letter, Morgan Stanley said the fund wasn’t designed to offer full liquidity because of the nature of its investments, and that credit fundamentals across the underlying portfolio have been broadly stable. The bank's shares fell 2% in premarket trading Thursday" [1].

[1] https://www.wsj.com/livecoverage/stock-market-today-dow-sp-5...

> liquidity crisis in the former to cause a crisis of confidence in the latter

Wait what? Your thesis is the GFC was caused by a liquidity crunch/bank run? Isn't that... not true?

Isn't the proximal to distal chain of events government encouraged subprime loans -> inaacurately valued MBS -> exponential, unregulated derivative instruments -> leveraged contagion. What does market confidence have to do with any of that?

> your thesis is the GFC was caused by a liquidity crunch/bank run? Isn't that... not true?

It's absolutely proximally true and it's not just my thesis. From Wikipedia: "The first phase of the crisis was the subprime mortgage crisis, which began in early 2007, as mortgage-backed securities (MBS) tied to U.S. real estate, and a vast web of derivatives linked to those MBS, collapsed in value. A liquidity crisis spread to global institutions by mid-2007 and climaxed with the bankruptcy of Lehman Brothers in September 2008, which triggered a stock market crash and bank runs in several countries" [1].

> government encouraged subprime loans -> inaacurately valued MBS -> exponential, unregulated derivative instruments -> leveraged contagion

The subprime crisis shouldn't have been bigger than the S&L crisis [2]. What turned it into a financial crisis was the credit crunch that followed. That crunch was caused by folks running on banks that had sponsored these products.

On "inaccurately valued MBS," note that the paper marked AAA mostly paid out like a AAA security. It would be like if you were perfectly good for your word and I lent you money, but then I wanted to sell on that debt to a third party who didn't trust you at a 50% discount. What does "properly valued" mean in that context? It's ambiguous in a dangerous way. (In this analogy, you wind up paying back the debt at face value. But years later, albeit on schedule.)

[1] https://en.wikipedia.org/wiki/2008_financial_crisis

[2] https://en.wikipedia.org/wiki/Savings_and_loan_crisis

That was the structural problem. Definitely bad. A weak economy propped up by some 'fake' money.

Oil was more of the outside force that put a shock to that weak system.

I think the GP is trying to say that oil prices where the nudge that pushed the bad loans and derivatives out of stability.

I don't remember oil getting expensive back then, but it's a long time ago.

it did. GFC was a financial recession no doubt, but oil prices was one of the final things that tipped everything over. Oil prices climbed high, slowed economic activity a bit, and the whole financial that teetering just collapsed.

Now the subprime credit of entire cities is being sold bank to bank. I'd argue that's a direct escalation of the 2008 credit crisis.

There were many involved factors, but the 2008 financial crisis was started when Ben Bernanke raised interest rates.

That was the structural problem.

But it was swept under the rug, it was hidden by market constantly going up.

Ponzi schemes can hide in a market going up, because nobody is trying to pull money back out.

Suddenly everyone wanting their money, and the shortfall suddenly become apparent.

Oil prices suddenly made everyone try to pull money out, and 'woops there is nothing here'.

I did make a snarky derivatives comment elsewhere in the thread, but I do see you're not wrong about oil prices peaking at $138 in June 2008 (Lehman collapsed in September 2008): https://fred.stlouisfed.org/series/DCOILBRENTEU