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Moral hazard and the financial crisis of 2007-9: An Explanation for why the subprime mortgage defaults and the housing market collapse produced a financial crisis that was more severe than any previous crashes (with exception of the Great Depression of 1929)

Author

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  • Ronald Jean Degen

    (International School of Management Paris)

Abstract

This paper examines the financial crisis in 2007-9 that was more severe than previous crashes, including the dot-com crash of 2001 and the market crash of 1987 (with the exception of the Great Depression of 1929). This severity was due to excessively risky speculative bets taken by the executives of financial institutions. When the ?housing bubble? burst, these speculative bets, which were based on the U.S. housing market and the subprime mortgages, triggered the financial systemic failures of the U.S. in June 2007 (the subprime mortgage crisis) and September 2008 (the shadow-banking crisis). The systemic financial failure of September 2008 (the shadow-banking crisis) was greatly amplified by excessively risky speculations and this led to a rapid deterioration of the entire global economy. This paper examines the potential for moral hazard in the financial system leading up to this crisis, and attempts to determine if this was a motivating factor in these risky bets.

Suggested Citation

  • Ronald Jean Degen, 2009. "Moral hazard and the financial crisis of 2007-9: An Explanation for why the subprime mortgage defaults and the housing market collapse produced a financial crisis that was more severe than any previou," Working Papers 46, globADVANTAGE, Polytechnic Institute of Leiria.
    • Handle: RePEc:pil:wpaper:46
    as

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    File URL: https://globadvantage.ipleiria.pt/files/2009/10/working_paper-46_globadvantage.pdf
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    References listed on IDEAS

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    1. G. M.P. Swann, 2009. "The Economics of Innovation," Books, Edward Elgar Publishing, number 13211.
    2. George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Costa Cabral, Nazare, 2010. "Breve guia temático e bibliográfico sobre o estudo da actual crise financeira e económica [Short thematic guide to the study of current financial and economic crisis]," MPRA Paper 20743, University Library of Munich, Germany.
    2. Ronald Degen, 2014. "How graduate business schools professors can assist in reducing today's lack of ethics in business," Working Papers 109, globADVANTAGE, Polytechnic Institute of Leiria.
    3. Ronald Jean Degen, 2013. "How career counseling, management coaching, and mentoring can assist in reducing today's lack of ethics in business," Working Papers 105, globADVANTAGE, Polytechnic Institute of Leiria.
    4. Dilyana Dimova, 2012. "The Role of Consumer Leverage in Generating Financial Crises," Economics Series Working Papers 631, University of Oxford, Department of Economics.

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    More about this item

    Keywords

    moral hazard; financial crisis of 2007-9; burst of the housing bubble; subprime mortgages crisis; shadow-banking crisis;
    All these keywords.

    JEL classification:

    • L0 - Industrial Organization - - General
    • M0 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - General
    • M1 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration

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