Abheek Barua: One year of the sub-prime crisis

A popular example of the complexity of "chaos" theory involves a butterfly flapping its wings somewhere in Latin America and through an intricate chain of linkages setting off a powerful tornado thousands of miles across the globe. The current financial crisis is perhaps an equally poignant illustration. What started as a sell-off in the market for American mortgage-backed bonds sometime in July 2007 has now manifested in a sharp rise in inflation rates in Asian economies.

One of the errors in judgement, in my opinion, that economists made at the early stages of the crisis was in making the following assumption