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An Overview of the Crisis: Causes, Consequences, and Solutions-super-

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  • FRANKLIN ALLEN
  • ELENA CARLETTI

Abstract

What caused the crisis? Initially many thought that it was due to incentive problems in the U.S. mortgage industry. However, after the large economic meltdown following Lehman Brothers' bankruptcy in September 2008, it seems that much more was going on. We argue that there was a bubble in real estate prices in the United States and a number of other countries. The main causes of the bubble were loose monetary policy, particularly by the United States Federal Reserve, and global imbalances. The combination of cheap credit together with the easy availability of funds contributed to create the bubble. Many other factors such as subprime mortgages, weak regulatory structures, and high leverage in the banking sector exacerbated the effects of the crisis. We consider possible reforms aimed at minimizing the occurrence of future crises in the governance structure of central banks, measures to reduce global imbalances, and changes in banking regulation. Copyright (c) 2010 The Authors. Journal compilation (c) International Review of Finance Ltd. 2010.

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Article provided by International Review of Finance Ltd. in its journal International Review of Finance.

Volume (Year): 10 (2010)
Issue (Month): s1 ()
Pages: 1-26

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Handle: RePEc:bla:irvfin:v:10:y:2010:i:s1:p:1-26

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  1. Elena Loukoianova & Gianni De Nicoló & John H. Boyd, 2009. "Banking Crises and Crisis Dating," IMF Working Papers 09/141, International Monetary Fund.
  2. Allen, Franklin & Carletti, Elena & Gale, Douglas, 2009. "Interbank market liquidity and central bank intervention," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 639-652, July.
  3. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  4. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," NBER Working Papers 13882, National Bureau of Economic Research, Inc.
  5. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Banking Crises: An Equal Opportunity Menace," NBER Working Papers 14587, National Bureau of Economic Research, Inc.
  6. Reinhart, Carmen M. & Rogoff, Kenneth S., 2009. "The Aftermath of Financial Crises," Scholarly Articles 11129155, Harvard University Department of Economics.
  7. Guillaume Plantin & Haresh Sapra & Hyun Shin, . "Marking to Market: Panacea or Pandora’s Box ?," GSIA Working Papers 2005-E4, Carnegie Mellon University, Tepper School of Business.
  8. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
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Cited by:
  1. Reinhart, Carmen & Rogoff, Kenneth, 2009. "The Aftermath of Financial Crises," CEPR Discussion Papers 7209, C.E.P.R. Discussion Papers.
  2. Breitenfellner, Bastian & Wagner, Niklas, 2010. "Government intervention in response to the subprime financial crisis: The good into the pot, the bad into the crop," International Review of Financial Analysis, Elsevier, vol. 19(4), pages 289-297, September.
  3. Dieter Gramlich & Mikhail V. Oet & Stephen J. Ong, 2013. "Policy in adaptive financial markets—the use of systemic risk early warning tools," Working Paper 1309, Federal Reserve Bank of Cleveland.
  4. Avkiran, Necmi K. & Goto, Mika, 2011. "A tool for scrutinizing bank bailouts based on multi-period peer benchmarking," Pacific-Basin Finance Journal, Elsevier, vol. 19(5), pages 447-469, November.
  5. Masciandaro, Donato & Pansini, Rosaria Vega & Quintyn, Marc, 2013. "The economic crisis: Did supervision architecture and governance matter?," Journal of Financial Stability, Elsevier, vol. 9(4), pages 578-596.
  6. Olivier Bruno & André Cartapanis & Eric Nasica, 2014. "Bank Leverage, Financial Fragility and Prudential Regulation," GREDEG Working Papers 2014-12, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
  7. Augusto Hasman, 2013. "A Critical Review Of Contagion Risk In Banking," Journal of Economic Surveys, Wiley Blackwell, vol. 27(5), pages 978-995, December.
  8. Pol, Eduardo, 2012. "The preponderant causes of the USA banking crisis 2007–08," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(5), pages 519-528.
  9. Cabral, Ricardo, 2013. "A perspective on the symptoms and causes of the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 103-117.
  10. Timothy Bianco & Dieter Gramlich & Mikhail V. Oet & Stephen J. Ong, 2012. "Financial stress index: a lens for supervising the financial system," Working Paper 1237, Federal Reserve Bank of Cleveland.
  11. Swamy, Vighneswara & S, Sreejesh, 2012. "Financial Instability, Uncertainty and Banks’ Lending Behaviour," MPRA Paper 47518, University Library of Munich, Germany.

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