A Political-Economy of the U.S. Subprime Meltdown
AbstractWhat 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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Bibliographic InfoArticle 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)
subprime mortgage; US Federal Reserve; securitization; collateralized debt obligation;
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
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Reinhart, Carmen & Felton, Andrew, 2008. "The First Global Financial Crisis of the 21st Century," MPRA Paper 11862, University Library of Munich, Germany.
- Barry Eichengreen & Michael D. Bordo, 2002. "Crises Now and Then: What Lessons from the Last Era of Financial Globalization," NBER Working Papers 8716, National Bureau of Economic Research, Inc.
- Yuliya Demyanyk, 2009. "Quick exits of subprime mortgages," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 79-94.
- Ashcraft, Adam B. & Schuermann, Til, 2008.
"Understanding the Securitization of Subprime Mortgage Credit,"
Foundations and Trends(R) in Finance,
now publishers, vol. 2(3), pages 191-309, June.
- Adam B. Ashcraft & Til Schuermann, 2008. "Understanding the securitization of subprime mortgage credit," Staff Reports 318, Federal Reserve Bank of New York.
- Markus K. Brunnermeier, 2008. "Deciphering the Liquidity and Credit Crunch 2007-08," NBER Working Papers 14612, National Bureau of Economic Research, Inc.
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