Houses, Banks, and Financial Markets : Why the Crisis this Time?

The current global economic and financial crises are alarming in both severity and length. We study the anatomy of the collapse by comparing the current precipitant (housing crisis) with the previous U.S. housing crisis of the early 1990s. Our analysis suggests that the greater severity of this episode is driven by several factors: default proclivity (to typical triggers) and bank lending retrenchment are different across the previous and current episodes. Most importantly however, we document different linkages between the housing sector, the banking sector and stock market across the two episodes. We conclude that the duration of the current episode is likely to significantly exceed the duration of the prior episode