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Lessons and consequences of the evolving 2007-? Credit Crunch

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  • Corneil, Bruce L.
  • McNamara, Sue
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    Abstract

    We are neither economists nor academic scholars; however we are students of the markets having experienced the credit crunch on the front lines as institutional investors from a country that is neither in Europe nor is the United States (i.e. Canada). The credit crunch and related “Great Recession” have instilled havoc on the global economy. The crisis has led to a large contraction of the real economy of approximately 1% of real GDP in 2009, which could have been considerably larger without massive government sponsored stimulus plans. In the aftermath of every crisis there are always lessons to be learned. The main takeaways from the most recent credit crunch centre on risk distortion, the flawed counterparty risk offset model, excessive leverage, inherent conflicts of interest and the legacy of creating “too big to fail” financial institutions. As financial markets appear to have stepped back from the brink of destruction, we believe that there are three major consequences that we are currently facing. First the global financial system will likely be irrevocably changed by new regulations. Second, on the economic front, we are facing a post-recession period of relatively low global growth. Third, developing countries’ governments are facing massive budget deficits and their debt/GDP levels are likely unsustainable and therefore requiring severe fiscal austerity programs.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35912.

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    Date of creation: Dec 2010
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    Handle: RePEc:pra:mprapa:35912

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    Keywords: Credit Crisis; Solutions; Securitization; CDS;

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    1. Paolo Di Martino, 2010. "This time is different: eight centuries of financial folly - By Carmen M. Reinhart and Kenneth S. Rogoff," Economic History Review, Economic History Society, vol. 63(4), pages 1202-1203, November.
    2. Weidenmier, Marc, 2010. "This Time is Different: Eight Centuries of Financial Folly. By Carmen Reinhart and Kenneth Rogoff. Princeton, NJ: Princeton University Press, 2009. $35.00," The Journal of Economic History, Cambridge University Press, vol. 70(03), pages 766-768, September.
    3. Eric Tymoigne, 2009. "Securitization, Deregulation, Economic Stability, and Financial Crisis, Part I--The Evolution of Securitization," Economics Working Paper Archive wp_573_1, Levy Economics Institute.
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    5. Ranald Michie, 2010. "This time is different: eight centuries of financial folly," Business History, Taylor & Francis Journals, vol. 52(4), pages 689-691.
    6. Yeva Nersisyan & L. Randall Wray, 2010. "The Global Financial Crisis and the Shift to Shadow Banking," Economics Working Paper Archive wp_587, Levy Economics Institute.
    7. Mark Billings, 2010. "This time is different: eight centuries of financial folly," Accounting History Review, Taylor & Francis Journals, vol. 20(3), pages 417-420.
    8. Jan Kregel, 2010. "Is Reregulation of the Financial System an Oxymoron?," Economics Working Paper Archive wp_585, Levy Economics Institute.
    9. Jan Kregel, 2009. "Observations on the Problem of 'Too Big to Fail/Save/Resolve'," Economics Policy Note Archive 09-11, Levy Economics Institute.
    10. Alan Ahearne & Joseph Gagnon & Jane Haltmaier & Steve Kamin ... [et al.]., 2002. "Preventing deflation: lessons from Japan's experience in the 1990s," International Finance Discussion Papers 729, Board of Governors of the Federal Reserve System (U.S.).
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