Must-Read: It still boggles my mind that the Federal Reserve did not move ten years ago today to set up a Subprime Mortgage and Home Equity Resolution Authority. Ben Bernanke! If there were one person who ought to have understood the need to be prepared, it would have been Ben Bernanke! And yet he showed no signs of understanding what the fan of possible futures he was then facing happened to be.

And, no, it is not appropriate for a central bank to wait for the political branches to act before it undertakes its lender-of-last-resort mission…

Martin Sandbu: Ten years on: Anatomy of the global financial meltdown: “August 9 2007 was the day when BNP Paribas, the French bank, froze three investment funds…

Investors whose money was placed in suddenly toxic securities linked to US real estate, were no longer permitted to cash out their investments…. As my colleagues John Authers and Alan Smith point out… the summer months of 2007 saw a rapid deterioration of the market values of many financial products—a sign that the Bear Stearns episode raised broader fears…. Bear Stearns’ move was the first clear admission that the assets its funds had invested in were worth much less than almost everyone had thought. It was the first clear sign of unrealised losses in the US and, by extension, the global financial system. In short, it was the first clear exposure of a solvency problem.

The August 9 event marked the next phase, where doubts about solvency turned into a liquidity problem. As Stephen Cecchetti and Kermit Schoenholtz nicely show, BNP’s halting of redemptions was followed by an immediate tightening of lending between financial institutions…. The June 22 solvency event can thus be seen as the forerunner of Bear Stearns’ total collapse in March 2008. The August 9 liquidity event can be seen as the forerunner of the bank run on Northern Rock in the UK a month later. And together they presage the demise of Lehman Brothers and Washington Mutual in September 2008….

The essentials of a crisis… are twofold. First is the readjustment of expectations about how much economic value there is to go around, and in particular the realisation by market participants that it is insufficient to honour all the claims racked up in the boom. Second is the proliferation of uncertainty through the web of short-term liquid funds that financial institutions provide one another….

There is also an inkling here of what it takes to handle a crisis well…. The sooner losses can be crystallised in full, the better. That requires difficult political decisions—but as the past 10 years have surely shown, indecision ultimately imposes a much greater cost.