Shalendra D. Sharma () (University of San Francisco, St. Ignatius Institute, 2130 Fulton Street, San Francisco, CA 94117-1080)
Abstract
What began as a downturn in the U.S. housing sector in mid-2007 soon mushroomed into a global financial crisis by September 2008. Why was the crisis triggered in the United States renowned for its resilient and innovative economic system? Why the crisis, which began with the implosion of a relatively small part of the U.S. housing market (the subprime mortgages) quickly morphed into a credit crunch, plunging the world economy in the worst financial crisis since the Great Depression? And, what explains the failure of both the market participants and public authorities to anticipate (at least initially) the depth and gravity of the crisis? In contrast to conventional explanations that see the crisis rooted in the procyclicality of the financial system, or the result of Wall Street greed and incompetence, this article provides a political-economy analysis of the complex series of events that lead to U.S. subprime meltdown. Specifically, the paper illustrates that the subprime crisis is fundamentally the result of massive regulatory failure in the United States. Although both market actors and regulators failed to properly assess the risks of complex assets, powerful lawmakers (both Republicans and Democrats) and regulators whose responsibility was to maintain due diligence against potentially destructive market failure, clearly failed in their responsibility.
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Article provided by Queensland University of Technology (QUT), School of Economics and Finance in its journal Economic Analysis and Policy (EAP).
Volume (Year): 39 (2009) Issue (Month): 2 (September) Pages: 171-190 Download reference. The following formats are available: HTML
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Find related papers by JEL classification: A10 - General Economics and Teaching - - General Economics - - - General H50 - Public Economics - - National Government Expenditures and Related Policies - - - General H60 - Public Economics - - National Budget, Deficit, and Debt - - - General O51 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - U.S.; Canada
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