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An Overview of the Crisis: Causes, Consequences, and Solutions-super-

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  • FRANKLIN ALLEN
  • ELENA CARLETTI

Abstract

What caused the crisis? Initially many thought that it was due to incentive problems in the U.S. mortgage industry. However, after the large economic meltdown following Lehman Brothers' bankruptcy in September 2008, it seems that much more was going on. We argue that there was a bubble in real estate prices in the United States and a number of other countries. The main causes of the bubble were loose monetary policy, particularly by the United States Federal Reserve, and global imbalances. The combination of cheap credit together with the easy availability of funds contributed to create the bubble. Many other factors such as subprime mortgages, weak regulatory structures, and high leverage in the banking sector exacerbated the effects of the crisis. We consider possible reforms aimed at minimizing the occurrence of future crises in the governance structure of central banks, measures to reduce global imbalances, and changes in banking regulation. Copyright (c) 2010 The Authors. Journal compilation (c) International Review of Finance Ltd. 2010.

Suggested Citation

  • Franklin Allen & Elena Carletti, 2010. "An Overview of the Crisis: Causes, Consequences, and Solutions-super-," International Review of Finance, International Review of Finance Ltd., vol. 10(s1), pages 1-26.
  • Handle: RePEc:bla:irvfin:v:10:y:2010:i:s1:p:1-26
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1065-1188, November.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," American Economic Review, American Economic Association, vol. 99(2), pages 466-472, May.
    4. Allen, Franklin & Carletti, Elena & Gale, Douglas, 2009. "Interbank market liquidity and central bank intervention," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 639-652, July.
    5. Elena Loukoianova & Gianni De Nicolo & John H. Boyd, 2009. "Banking Crises and Crisis Dating; Theory and Evidence," IMF Working Papers 09/141, International Monetary Fund.
    6. Guillaume Plantin & Haresh Sapra & Hyun Song Shin, 2008. "Marking-to-Market: Panacea or Pandora's Box?," Journal of Accounting Research, Wiley Blackwell, vol. 46(2), pages 435-460, May.
    7. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
    8. Reinhart, Carmen M. & Rogoff, Kenneth S., 2013. "Banking crises: An equal opportunity menace," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4557-4573.
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