A liquidity shortage, beginning in late 2007, sparked a series of events that resulted in the collapse of large financial institutions and dramatic downturns in key stock markets. The crisis played a significant role in determining extensive failures of economic activities, declines in consumer demand and wealth, and a severe recession in many areas of the globalised world. Even more depressing consequences were avoided owing to exceptional interventions by monetary authorities and governments, which directly supported the financial markets with bailout policies and massive injections of liquidity. These interventions resulted in further important consequences, with the ex ante distortion of incentives—leading intermediaries to choose arrangements with excessive illiquidity and thereby increasing financial fragility—being the most important.
