Three Facets of Liquidity Illusion: Financial Innovation and the Credit Crunch‪.‬

Introduction In the summer of 2007, a contagious liquidity meltdown hit the world markets. Sparked by the sub-prime mortgage fiasco in the USA, financial panic and tumbling asset values did not only destabilise the American financial system, but have also shaken the European and Asian markets. Over the course of the following eighteen months, a contagious financial crisis has been transformed into a recession that increasingly becomes world-wide. Some analysts evaluate the losses related to the global credit crunch at around $2 trillion (Roubini 2008). The casualty count from the global credit crunch has included high-profile firms like Bear Sterns, Lehman Brothers and AIG insurance firms in the US, Northern Rock and Lloyds (HBOS) in the UK, several European banks, companies in the real economy, the entire banking system of Iceland and crucially, growing numbers of people who have lost or are on the brink of losing their homes and jobs.