In the last few months we have seen several major financial institutions be absorbed by other financial institutions, receive government bailouts, or outright crash. So what caused the financial crisis of ?
No act of God. The report is weak and inconclusive, with no clear root causes. So other than making for a nice history of the worst financial crash since the Great Depression, the report will have little impact. I skimmed all three versions, and frankly they all contain truths.
The criticism of the majority report that it is more a list of problems than a report on root causes is fair. Relying on judgment rather than an exhaustive investigation, let me try my best to suggest root causes and implied solutions.
To identify root causes, it is essential to take a systems approach to the problem, which assumes human frailties, be they hubris, greed, or incompetence. It is of little use to say the crisis happened because human beings, bankers and regulators, were not perfect. It is the height of folly to suggest that a solution rests in improving human decision-making next time.
Only systemic change will generate a different outcome. Excess leverage is at the center of all banking crises, by definition. Leverage goes beyond balance sheets. Leverage is embedded in off-balance-sheet instruments such as derivatives.
And dangerous hidden leverage is embedded in structured securities. We have no transparent accounting for leverage, so limiting it is complex and beyond the skill of legislators to efficiently write into law, and beyond the ability of regulators to manage as we have learned.
The only solution is to impose radically higher capital requirements, intentional overkill, recognizing and accepting the consequences, which are far less harmful than the financial crisis we have just experienced.
Then let the industry figure out how to improve accounting and transparency that will enable more efficient, yet still adequate, capital requirements. Invite such an industry and FASB joint initiative, but until robust solutions are developed, follow the precautionary principle. The bankers and certain highly leveraged hedge funds will squeal, reported profits will fall, volume of transactions will slow, the financial sector will shrink, and bonuses will follow.
Similar to leverage, liquidity mismatches lending long, borrowing short must be dramatically curtailed. That Lehman was funding real estate holdings in the Repo and commercial paper markets was sheer folly, apparently understood as a joke even inside the firm.
There is no reason for an investment bank to be speculating on buildings with the implicit backing of taxpayers.
The Basel III liquidity ratios are an important battle to watch. Why there have been no fraud prosecutions at Lehman and other firms who mislead investors about their true liquidity position via accounting gimmicks as now well documented, away from the FCIC process, is impossible to understand.
Too Big To Fail. This demands an altered system architecture. The academic studies assessing economies of scale and scope are flawed and a distraction from the real issue. All systems need to balance efficiency with resiliency as any systems scientist but few bankers or Treasury Secretaries understand.
Resiliency is improved by immense diversity, decentralization, and maintenance of excess buffers. In no other profession are such blatant conflicts of interest tolerated. Forcing the financial industry to pick a line of business and customer type to serve will solve the conflict problem while improving system resiliency due to the increased diversity of firms.
Such arguments are self-serving and patently false. And even if clients desire a bank to do certain things, this does not mean it is in the public interest to allow it to happen.
Tax policy has a significant impact on the cost and flow of capital and the current tax code as it affects finance needs an overhaul. We need a much more progressive capital gains tax that has the effect of encouraging real long-term investment over short-term speculation.
The beneficial tax treatment of carried interest is absurd and yet legislators cower. We need to ensure that the subsidy provided to retail banks via FDIC insurance which is a sensible public good is recycled back into the real main street economy rather than used to subsidize speculation by Wall Street.
We need to eliminate the subsidy on debt based financing, encouraging more debt when we have too much already.An economic bubble or asset bubble (sometimes also referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania, or a balloon) is trade in an asset at a price or price range that strongly exceeds the asset's intrinsic value.
It could also be described as a situation in which asset prices appear to . The Great Recession – Causes and Effects of the Financial Crisis Posted by Ryan Guina Last updated on November 8, | Family & Home The Great Recession is the name commonly given to the – financial crisis that affected millions of Americans.
In , the ratio between the income of the top and bottom 20 percent of the world's population was three to one. By , it was eighty-six to one.
A study titled "Divided we Stand: Why Inequality Keeps Rising" by the Organisation for Economic Co-operation and Development (OECD) sought to explain the causes for this rising inequality by investigating economic inequality .
May 10, · "With all of the complexities of the housing bubble and the subsequent global financial crisis, it can seem like a web of deceit. But it all boils down to one simple actor. It wasn't Wall Street. RESEARCH PAPER 09/ 22 APRIL The financial crisis in the US: key events, causes and responses: The current financial crisis started in .
Finance, a sub-discipline of economics, focused on topics such as how to price assets. The carnage of changed that.
Economists, investors and central bankers turned back to the big question.