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The credit crisis and the Dutch economy... in eight frequently asked questions

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Author Info
Michiel Bijlsma ()
Wim Suyker ()

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Abstract

Over the course of the past few years, too much credit has been made available worldwide, due to financial innovation, overly optimistic expectations and loophole-ridden regulation. Regulatory supervisors have failed because they were unable to prevent this situation.

Things took a bad turn last year with ill-advised mortgages that were nevertheless granted to a great many American homeowners who were not credit-worthy. As a consequence, banks suffered heavy losses. Subsequently, banks lost money on other products, which strongly undermined their capacity to extend credit. At the same time, mistrust increased among banks, while disquiet grew among bank clients. Governments worldwide rightly took steps to avoid a situation of massive bank failures. This would, as it did in the 1930s, lead to a deep recession and widespread unemployment. The Dutch government has thus far committed 30 billion euro in capital to banks, promised 200 billion euro in credit guarantees, and extended the legislation governing deposit insurance.

This crisis will lead to major changes in the financial sector and in the regulation of that sector. In creating new legislation, governments should take care not to overshoot, since efficient financial markets stimulate both investment and innovation. While the recent interventions by the Dutch government have been necessary, it is desirable that the state moves as quickly as possible toward decreasing its stakes in the financial sector, in order to avoid harmful economic effects.

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Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Memoranda with number 210.

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Date of creation: Apr 2009
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Handle: RePEc:cpb:memodm:210

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Related research
Keywords: financial crisis; regulation; bank failures; financial markets; Netherlands;

Find related papers by JEL classification:
G01 - Financial Economics - - General - - - Financial Crises
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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This page was last updated on 2009-11-20.

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