Abstract
This paper adds to the explanation of financial crises by employing the concepts of liquidity lock, portfolio shifting, and the wealth effect in the context of the 2007-9 financial crisis and of internationalized money manager capitalism. The paper reviews four major crisis theories and follows with a summary account of the recent financial crisis. The paper constructs a model in which portfolio shifts driven by perceived changes in risk and return are instrumental in creating liquidity lock. Sharp asset price changes affect net worth and aggregate demand, creating policy difficulties for economic leaders. The paper ends by addressing the competing options available to policymakers in late 2008 and 2009.