A speculative boom and an excessive accumulation of debt stood at the center of many of crises. Governments, corporations, individual households borrowed too much money, much of it denominated in foreign currencies. At the same time, banks and other financial institutions lent too much against collateral of shaky value. This situation was unsustainable, and eventually doubts about the viability of all those loans triggered a panic. The resulting crisis necessarily hit both excessively indebted borrowers and excessively leveraged lenders.
Over the previous two decades, bankers and traders had increasingly been rewarded with bonuses tied to short-term profits, giving them an incentive to take excessive risks, leverage up their investments, and bet the entire bank on astonishingly reckless investment strategies.
Shadow banking system:
(1)borrow from the "depositors" (like purchasers of commercial paper) who lent these entities money on a short-term basis.
(2)then shadow banks sank money into illiquid, risk, long-term securities: MBS, CDOs, etc.
(3)when panics struck, "depositors" demand money or refuse to renew loans, forcing shadow banks to liquidate their securities at fire-sale prices.
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