The story behind the recent volatility reads rather like a children's tale: US interest rates were slashed at the end of 2001 following the September 11th terrorist attacks and a huge wave of lending, particularly of the mortgage variety, followed.
Out of this, the so-called subprime sector, where mortgages were given to people with poor credit histories, was born and many of these lenders packaged up the loans and sold them on to other investors.
These investors borrowed money to buy the debt and now that interest rates have risen, not only is it becoming more expensive to service it, but many of the mortgage holders themselves are struggling to keep up payments.
The main problem now is that this debt has been sold on so many times that nobody knows who is holding it and, as a result, who is going to lose money.
For this reason, banks have become loath to lend each other short-term funds and, as a result, liquidity has become a scarce commodity.
:quality(70)/cloudfront-eu-central-1.images.arcpublishing.com/irishtimes/VR3765MFOBH2NMV2QNICYDF67M.png)