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The Crisis of 2007--09: Nature, Causes, and Reactions

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  • Rosa M. Lastra
  • Geoffrey Wood

Abstract

This article analyses the nature and causes of the financial crisis of 2007--09 as well as the regulatory responses. There are two types of crises: banking crises, which affect the money stock and thus threaten the economy, and financial crises, which may destroy wealth but do not endanger the economy as a whole. Banking crises can be precipitated by a shortage of capital or by a shortage of liquidity. The 2007--09 crisis was a banking crisis, caused by a capital shortage. Numerous explanations have been given for this crisis. In this article these explanations are organized into ten groups. The main factors were easy money, excessive leverage, risk-management failures, bad lending, too-big-to-fail (TBTF) policies, inadequate supervision, and ill-thought-out regulation. The flurry of responses to the crisis is then summarized. Some are welcome, but the article concludes that unless the fear of failure returns to banking, so that management, shareholders, bondholders, and all creditors (except small depositors) suffer in a failure, then all other reforms will ultimately be pointless. Oxford University Press 2010, all rights reserved, Oxford University Press.

Suggested Citation

  • Rosa M. Lastra & Geoffrey Wood, 2010. "The Crisis of 2007--09: Nature, Causes, and Reactions," Journal of International Economic Law, Oxford University Press, vol. 13(3), pages 531-550, September.
  • Handle: RePEc:oup:jieclw:v:13:y:2010:i:3:p:531-550
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    File URL: http://hdl.handle.net/10.1093/jiel/jgq022
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    Cited by:

    1. Leone Leonida & Eleonora Muzzupappa, 2018. "Do Basel Accords influence competition in the banking industry? A comparative analysis of Germany and the UK," Journal of Banking Regulation, Palgrave Macmillan, vol. 19(1), pages 64-72, January.
    2. Hempel Dominika, 2017. "American Investment Banking in the Context of Great Economic Crises," Studia Historiae Oeconomicae, Sciendo, vol. 35(1), pages 47-60, December.

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