Electronic copy available at: http://ssrn.com/abstract=1738486
1. A Brief Introduction to the Financial Crisis
According to leading economic figures, the financial crisis of 2007–2010 has been themost severe financial downturn since the Great Depression of the 1930s.
Economist PeterMorici coined the term the “The Great Recession” to describe the period. While thecauses are still being debated, many ramifications are clear and include the failure of major corporations, large declines in asset values (some estimates put the drop in thetrillions of dollars range), substantial government intervention across the globe, and asignificant decline in economic activity.
Both regulatory and market based solutionshave been proposed or executed to attempt to combat the causes and effects of the crisis.At the time of this writing, significant risks remain for the world economy over thecoming years.
After peaking in the United States in 2006, the global housing bubble collapsed. On thenational level, home prices in the United States have dropped by almost 40% according tothe Case-Schiller Home Price Index from 2006 peak to mid 2009. Securities with risk exposure to housing market plummeted, causing great damage to financial institutionsacross the globe. Stock markets all over the world suffered large drops in 2008 and early2009 as questions arose regarding the solvency of major financial institutions andliquidity in the credit markets dried up. Worldwide growth slowed with the tightenedcredit markets and declines in international trade.
While a cover story in BusinessWeek Magazine claims that economists mostly failed topredict the worst international economic crisis since the Great Depression of 1930s,Governments, central banks, andinternational organizations implemented various plans including fiscal expansion,monetary expansion and institutional bailouts at a scale never before seen to attempt tocombat the crisis. Many analysts have allocated blame to inaccurate credit ratings formortgage-backed securities (MBS) and antiquated financial regulatory practices.
2. The Causes
noteveryone was caught off guard. Dirk Bezemer in his research credits 12 economists withpredicting (with supporting argument and estimates of timing) the crisis: Dean Baker(US), Wynne Godley (US), Fred Harrison (UK), Michael Hudson (US), Eric Janszen(US), Stephen Keen (Australia), Nouriel Roubini (US/Turkey), Jakob Brøchner Madsen& Jens Kjaer Sørensen (Denmark), Kurt Richebächer (US), Peter Schiff (US), RobertShiller (US).