Much has been written about the crisis in the US credit markets that has brought down major investment banks, seized up credit and paralysed Wall Street. What sparked it off? We know that something strange happened in the American real-estate market — where “sub-prime” borrowers, or those who didn’t have a history of good, timely payments, were given lots of home loans that, eventually, they couldn’t pay. We also know that complex financial contracts — derivatives — which were meant to spread the risk of those defaults around, stopped working, or had been given completely the wrong price, leading to much insecurity in the markets about who had what risky loans on their balance sheets. What we don’t know is why it happened when and where it did.

Some people might claim that the trigger for a financial unwinding could have come from anywhere; but, even so, why did it come from real estate, and why was it in America? A new paper, published last week by Luci Ellis, an economist at the Bank of International Settlements — a central bank for central banks — attempts to provide an answer, to explain a very special kind of American exceptionalism.

As she points out in the paper, parts of which are extracted alongside, many other countries had real estate markets that first boomed, than slowed; nowhere else did so many people stop paying, and eventually, through those arrears and defaults, cause chaos. She carefully analyses the various things that made the US housing market unique. For example, defaulters — and those who file for bankruptcy because of mortgage payments — are treated with considerably less severity in American legal codes than in most other places.

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