What Caused the Financial Crisis

Overview

The deflation of the subprime mortgage bubble in 2006-7 is widely agreed to have been the immediate cause of the collapse of the financial sector in 2008. Consequently, one might think that uncovering the origins of subprime lending would make the root causes of the crisis obvious. That is essentially where public debate about the causes of the crisis began—and ended—in the month following the bankruptcy of Lehman Brothers and the 502-point fall in the Dow Jones Industrial Average in mid-September 2008. However, ...

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What Caused the Financial Crisis

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Overview

The deflation of the subprime mortgage bubble in 2006-7 is widely agreed to have been the immediate cause of the collapse of the financial sector in 2008. Consequently, one might think that uncovering the origins of subprime lending would make the root causes of the crisis obvious. That is essentially where public debate about the causes of the crisis began—and ended—in the month following the bankruptcy of Lehman Brothers and the 502-point fall in the Dow Jones Industrial Average in mid-September 2008. However, the subprime housing bubble is just one piece of the puzzle. Asset bubbles inflate and burst frequently, but severe worldwide recessions are rare. What was different this time?

In What Caused the Financial Crisis leading economists and scholars delve into the major causes of the worst financial collapse since the Great Depression and, together, present a comprehensive picture of the factors that led to it. One essay examines the role of government regulation in expanding home ownership through mortgage subsidies for impoverished borrowers, encouraging the subprime housing bubble. Another explores how banks were able to securitize mortgages by manipulating criteria used for bond ratings. How this led to inaccurate risk assessments that could not be covered by sufficient capital reserves mandated under the Basel accords is made clear in a third essay. Other essays identify monetary policy in the United States and Europe, corporate pay structures, credit-default swaps, banks' leverage, and financial deregulation as possible causes of the crisis.

With contributions from Richard A. Posner, Vernon L. Smith, Joseph E. Stiglitz, and John B. Taylor, among others, What Caused the Financial Crisis provides a cogent, comprehensive, and credible explanation of why the crisis happened. It will be an essential resource for scholars and students of finance, economics, history, law, political science, and sociology, as well as others interested in the financial crisis and the nature of modern capitalism and regulation.

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Editorial Reviews

From the Publisher

"You will find in this collection some of the best efforts so far to understand the financial crisis."—Edmund Phelps, Columbia University

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Product Details

  • ISBN-13: 9780812221183
  • Publisher: University of Pennsylvania Press, Inc.
  • Publication date: 12/13/2010
  • Pages: 376
  • Sales rank: 1,124,951
  • Product dimensions: 5.50 (w) x 8.40 (h) x 1.10 (d)

Meet the Author

Jeffrey Friedman is a visiting scholar in the Department of Government at the University of Texas, Austin and Max Weber Senior Fellow at the Institute for Advancement of the Social Sciences, Boston University. He is the editor of Critical Review.
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Table of Contents

List of Illustrations vii

1 Capitalism and the Crisis: Bankers, Bonuses, Ideology, and Ignorance Jeffrey Friedman 1

Part I The Crisis in Historical Perspective

2 An Accident Waiting to Happen: Securities Regulation and Financial Deregulation Amar Bhidé 69

3 Monetary Policy, Credit Extension, and Housing Bubbles, 2008 and 1929 Steven Gjerstad Vernon L. Smith 107

Part II What Went Wrong (and What Didn't)?

4 The Anatomy of a Murder: Who Killed the American Economy? Joseph E. Stiglitz 139

5 Monetary Policy, Economic Policy, and the Financial Crisis: An Empirical Analysis of What Went Wrong John B. Taylor 150

6 Housing Initiatives and Other Policy Factors Peter J. Wallison 172

7 How Securitization Concentrated Risk in the Financial Sector Viral V. Acharya Matthew Richardson 183

8 A Regulated Meltdown: The Basel Rules and Banks' Leverage Juliusz Jablecki Mateusz Machaj 200

9 The Credit-Rating Agencies and the Subprime Debacle Lawrence J. White 228

10 Credit-Default Swaps and the Crisis Peter J. Wallison 238

Part III Economists, Economics, and the Financial Crisis

11 The Crisis of 2008: Lessons for and from Economics Daron Acemoglu 251

12 The Financial Crisis and the Systemic Failure of the Economics Profession David Colander Michael Goldberg Armin Haas Katarina Juselius Alan Kirman Thomas Lux Brigitte Sloth 262

Afterword: The Causes of the Financial Crisis Richard A. Posner 279

List of Abbreviations and Acronyms 295

Notes 297

References 319

List of Contributors 337

Index 343

Acknowledgments 359

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