Jean-Pierre Danthine: Taming the financial cycle

The crisis originated in the bursting of a house price bubble driven by an excessive credit expansion in the US, which eventually pushed the global financial system to the brink of collapse. In some countries, such as Spain or Ireland, the crisis was further compounded by the bursting of their own housing bubbles. In this regard, the current crisis is an excellent example. Historical evidence shows that the macroeconomic cost of an asset price bubble that bursts is particularly severe when the property market is affected. Moreover, such events tend to be more costly when the bubble is financed through credit and when leveraged financial institutions are directly involved.