An autopsy of the US financial system: accident, suicide, or negligent homicide
Purpose - The purpose of this postmortem is to assess whether the design, implementation, and maintenance of financial policies during the period from 1996 through 2006 were primary causes of the financial system's demise. Design/methodology/approach - To draw conclusions about the policy determinants of the crisis, the paper studies five important policies: Securities and Exchange Commission (SEC) policies toward credit rating agencies, Federal Reserve policies concerning bank capital and credit default swaps, SEC and Federal Reserve policies about over-the-counter derivatives, SEC policies toward the consolidated supervision of major investment banks, and government policies toward two housing-finance entities, Fannie Mae and Freddie Mac. Findings - The evidence is inconsistent with the view that the collapse of the financial system was caused only by the popping of the housing bubble (“accident”) and the herding behavior of financiers rushing to create and market increasingly complex and questionable financial products (“suicide”). Rather, the evidence indicates that senior policymakers repeatedly designed, implemented, and maintained policies that destabilized the global financial system in the decade before the crisis. Moreover, although the major regulatory agencies were aware of the growing fragility of the financial system due to their policies, they chose not to modify those policies, suggesting that “negligent homicide” contributed to the financial system's collapse. Originality/value - Although influential policymakers presume that international capital flows, euphoric traders, and insufficient regulatory power caused the crisis, this paper shows that these factors played only a partial role. Thus, current reforms represent only a partial and thus incomplete step in establishing a stable and well-functioning financial system. Since systemic institutional failures helped cause the crisis, systemic institutional reforms must be a part of a comprehensively effective response.
Volume (Year): 2 (2010)
Issue (Month): 3 (August)
|Contact details of provider:|| Web page: http://www.emeraldinsight.com|
|Order Information:|| Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK|
Web: http://www.emeraldinsight.com/jfep.htm Email:
References listed on IDEAS
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.:
- Barth,James R. & Caprio,Gerard & Levine,Ross, 2008.
"Rethinking Bank Regulation,"
Cambridge University Press, number 9780521709309, December.
- Barth,James R. & Caprio,Gerard & Levine,Ross, 2006. "Rethinking Bank Regulation," Cambridge Books, Cambridge University Press, number 9780521855761, December.
- Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
- Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
- Asli Demirgüç-Kunt & Ross Levine, 2009. "Finance and Inequality: Theory and Evidence," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 287-318, November.
- Asli Demirguc-Kunt & Ross Levine, 2009. "Finance and Inequality: Theory and Evidence," NBER Working Papers 15275, National Bureau of Economic Research, Inc.
- Demirguc-Kunt, Asli & Levine, Ross, 2009. "Finance and inequality : theory and evidence," Policy Research Working Paper Series 4967, The World Bank.
- Pinches, George E & Singleton, J Clay, 1978. "The Adjustment of Stock Prices to Bond Rating Changes," Journal of Finance, American Finance Association, vol. 33(1), pages 29-44, March. Full references (including those not matched with items on IDEAS)