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WP 2009-10 After Hubris, Smoke and Mirrors, The Downward Spiral: Financial and real markets pull each other down; how can policy reverse this?

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Abstract

The causes of the present crisis are largely to be found in the unregulated development of new financial products and in the over-expansion of the financial sector, in particular the shadow banking sector, which emerged precisely to avoid regulation. These changes led to lower risk perception, overvaluing of assets, overleveraging, and then to higher actual risk and instability. But the development of this instability, bringing on a crash, has also led to a collapse of the real side of the economy. The authors discuss the new financial arrangements and new types of regulation that are needed to prevent this happening again

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  • Edward Nell, Willi Semmler, 2009. "WP 2009-10 After Hubris, Smoke and Mirrors, The Downward Spiral: Financial and real markets pull each other down; how can policy reverse this?," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2009-10, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
  • Handle: RePEc:epa:cepawp:2009-10
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    Keywords

    financial crisis; real estate bubble; recession;

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