A relatively unforeseen implosion in housing markets figured prominently in the 2007 meltdown in capital markets and the subsequent downturn in the global economy. This column presents new research on the political geography of subprime lending. Congressional leaders – as well as other recipients of campaign contributions – may have benefited from gains to trade in the direction, pricing, and sizing of subprime mortgage loans.

The subprime crisis narrative focuses on incentives: ‘they knew it was risky, but didn’t care’. This column argues in favour of a more nuanced explanation, that distorted beliefs also mattered. An analysis of personal home transactions by mid-level managers in the mortgage-securitisation business shows that they increased their personal housing exposure during the boom. ‘Groupthink’ and distorted beliefs in the financial sector is something to take seriously if we want to prevent future crises.

Five years after the subprime bubble burst, the self-correcting nature of business cycles is being questioned and, subsequently, orthodox macroeconomic policy is starting to be challenged. This column introduces a radical rethink of options open to macroeconomic policymakers, suggesting that in order to simultaneously achieve economic stimulus without increasing debt, new money creation should be used to directly finance on-going budget deficits.

Did the rise in subprime mortgages – predominantly to black and Hispanic borrowers – lead to a fall in racial segregation as people were able to move to more desirable neighbourhoods? This column looks at extensive data on mortgages and changes in the ethnic mix at local schools. It finds that the credit boom that precipitated the global financial crisis may actually have increased racial segregation.

US Congressional committees are now grilling bankers on the complex instruments that provided subprime mortgages with a veil of security. This column presents new evidence that subprime mortgages had more serious consequences – they were a key factor in the US housing-price boom. When house prices faltered, subprime mortgage holders defaulted en masse, eventually leading to the global crisis.

Liquidity risk charges were proposed in February 2009 as a new macro-prudential tool to discourage systemic risk creation by banks. CEPR Policy Insight No. 40 refines this proposal in order to clarify challenging issues surrounding the implementation of liquidity risk charges.

In this new Policy Insight Enrico Perotti and Javier Suarez explain how a liquidity and capital insurance arrangement could provide emergency liquidity (and perhaps capital) and protect the economy against systemic crisis.

Correlated liquidity risks caused subprime mortgage problems to spread widely and sow panic that led to the credit crisis. This column proposes a mandatory liquidity charge to insure against collective bank runs in the future. It argues for charges proportional to securities’ maturity mismatches so as to discourage practices that create systemic risk.

What easy money brought forth in the new century, tight credit will take away in the years to come. Here one of France’s leading economists explains the origins of the subprime crisis and why it is likely to continue to unfold.