The Financial Crisis in Retrospect: A Case of Misunderstood Interdependence. Issue 3 (1st October 2016)

• Record Type: Journal Article
• Authors: Jabłecki, Juliusz
• Is Part Of: Critical review. Volume 28:Issue 3/4(2016)
• Page Start: 287
• Page End: 334
• Publication Date: 2016-10-01
• Subjects: Basel rules -- Basel II -- credit ratings -- executive compensation -- financial crisis -- housing bubble -- housing policy -- monetary policy -- mortgage-backed securities -- Recourse Rule -- residential mortgage-backed securities -- too big to fail; Libertarianism -- United States -- Periodicals; 320.512
• DOI: 10.1080/08913811.2016.1254320
• Languages: English
• ISSNs: 0891-3811

Abstract

ABSTRACT: The inherent complexity of modern financial systems, and their basis in human behavior, make it hard to establish unequivocally the "who, what, where, when, and why" of the global financial crisis. However, after almost a decade, we know enough to discard much of what has, in the meantime, become folk wisdom about the causes of the debacle, including Wall Street bonus culture, bankers' greed, the moral hazard of "too big to fail, " government intervention ("too much government") and deregulation ("not enough government"). While each of these factors may have played some role, the crisis can be much more accurately described as one of ignorance than malevolence. The common thread tying the emergence of the bubble to the disastrous consequences of its bursting is the misunderstanding of correlation and causation links in three key domains: economic policy, financial modeling, and the regulatory framework. These misunderstandings helped fuel the housing bubble and introduced fragility into the system, making it vulnerable to the bubble's subsequent, unavoidable burst.