The World Credit Crisis: Understanding It,and What to Do

The origin of the world credit crisis has four stages: (1) too much credit – an international perspective; (2) too much risk – reaction to low real interest rate; (3) the fatal flaw – the new complex financial instruments; and (4) the panic – bank lending dries up. The paper also discusses how the crisis spread around the world from the US, whether the high credit expansion was the fault of Alan Greenspan, whether China is to blame, and how this crisis related to the often expected crisis of global imbalances. Some implications for long‐term reform are discussed.