What were the primary causes of Global Financial Crisis?
- Vox DayCredit boom and malinvestment in the financial sector.
- Jacob MadsenAsset bubbles driven by excessive credit and low cost of capital that in turn was driven down by low price of risk.
- Ross LevineFinancial regulators and government officials too often work for the best interests of the executives of the financial services industry and not in the best interests of the public at large.
- Fred FoldvaryThe primary cause was massive subsidies to real estate, including cheap credit, favorable tax treatment, mortgage guarantees, Fannie Mae and Freddie Mac, and public works that increase land values.
- Jennifer TaubThe financial crisis was the result of the burst of a debt-fueled asset bubble which was enabled by government deregulation and low interest rates and corporate governance failures. Wall Street, K-Street and the C-Suite are to blame.
- John WasikGreed, deregulation, securitization, loose regulation of mortgage brokers/real estate agents, no regulation of ratings agencies, compensation tied to packaging mortgages, false belief in real estate as an investment, false belief in real estate as a secure asset, corruption by banks, Freddie/Fannie with Lobbyists, removal of Glass-Steagall protections.
- Paul SperryReaders Digest version: Washington through various regulatory and enforcement mechanisms socialized the mortgage industry and gutted traditional mortgage underwriting standards to help more lower-income minorities buy homes; and then, when those riskier loans failed, the politicians and regulators blamed Wall Street and the private sector, which merely responded to the perverse incentives mandated by government.
- James KwakThe Global Financial Crisis was caused by the combination of an unstable financial system and a credit bubble, which resulted from long-term shifts in the financial sector toward greater innovation and risk-taking. Traditional prudential regulation was unable to cope with the risks presented by this new system, in part because financial institutions innovated around existing regulatory structures and in part because the industry used its political power to dismantle existing regulations and block new ones.
- Jerry DavisThe primary causes of the financial crisis were too complicated to summarize in a sentence, but included financial deregulation and a race to the bottom among regulatory agencies, the transformation of banking via securitization, the compensation system of Wall Street banks, the mis-aligned incentives of the rating agencies, wealth effect-driven consumption arising out of home price increases, entrepreneurial opportunities created for mortgage brokers and house-flippers, and a handful of ancillary factors.
- Aaron ClareyA laziness and sloth brought about by the wealth-producing forces of capitalism in the post WWII era. This wealth made people soft and over 2-3 generations made these people forget there was no such thing as a free lunch. Instead of production, these veritable adult-children wanted to believe in perpetually increasing asset prices as the main form of wealth creation. The discrepancy between actual production and asset prices merely financed by mortgaging the future and burgeoning deficits at the state, federal and local levels.
- Dean BakerThe problem really is not a financial crisis. The problem was an economy driven by housing bubbles. When the bubbles burst there was nothing to replace the demand. In the case of the U.S. the demand lost by the plunge in construction and the loss of bubble-driven consumption was equal to about 8 percentage points of GDP. We have no tools that allow us to easily replace 8 percent of lost GDP, regardless of how well the financial system is working. We would be in pretty much the same place today if the bubble had deflated and there had been no financial crisis.
- Steve KeenA private debt bubble that began in the mid-1960s, should have terminated in the 1980s, but was allowed to move from one asset class to another by Federal Reserve rescues through a number of crises, until the debt level reached an unprecedented 300% of GDP. A slowdown in the rate of growth of this debt bubble in 2007 caused the turn from boom to bust, and deleveraging by the private sector is now the primary cause of the decline. Given that private debt is still about 170% of GDP too high--compared to the level of debt needed to fund productive rather than speculative activity--this crisis will continue for many years if bankruptcy and debt repayment are the only means used to reduce private debt.
- Christine RichardThe financial crisis was caused by the US economy becoming too reliant on credit and debt. For more than two decades we have ceded our manufacturing base to foreign countries - most notably China. This process involved a very seductive trade off. Our manufacturing/engineering/blue collar worker economy was exchanged for an unlimited demand to buy US dollar denominated securities by the rest of the world. Dollars piled up overseas as we bought more and more products from other countries and those dollars were handed back to people on Wall Street to invest in whatever they could create. Since there was no longer demand to finance factories, Wall Street created securities that financed consumption. The most efficient way to do that was through the housing market. There was no discipline in terms of what was created (toxic super senior CDOs) because there was demand to buy ANYTHING.
- Michael HirshDeregulation and fecklessness on the part of Washington as free-market fervor, which became a kind of national religion in the aftermath of the Cold War, established the canard of self-regulating markets as the ruling zeitgeist. Policy-makers came to ignore key differences between financial and other markets, which economists had known about for 300 years. Financial markets were always more imperfect than markets for goods and other services, more prone to manias and panics and more susceptible to the pitfalls of imperfect information unequally shared by market players. After the Great Depression authorities had understood that the financial markets must be more regulated than other markets, not least because they supplied the lifeblood of a capitalist economy: capital. Yet that critical distinction was lost in the whirlwind of fervor that championed free markets and market solutions, especially in the minds of overconfident U.S. policymakers, after the Cold War.
- John RubinoWe created a system based on central bank money creation and fractional reserve banking that was eventually guaranteed to build up unsustainable debts and then collapse. The process began in 1913 with the creation of the Fed, accelerated in 1971 with the abandonment of the gold standard, and finally crashed in 2000 with the bursting of the tech bubble. Since then the US has been actively trying to destroy the value of the dollar to decrease the cost of its debts. Viewed this way, the housing bubble was a logical outgrowth of the government's ongoing attempt to pump up asset values via money creation and a weaker dollar. It was just the latest in a series of mini bubbles within the larger dollar bubble. When the dollar bubble bursts it will sweep away most of the systems Americans now take for granted -- the global military empire, cradle-to-grave welfare, good public services. Savings will be vaporized and a whole generation impoverished. Very ugly decade coming.
- Viral AcharyaThe primary cause of the global financial crisis is that the externalities arising from a financial sector collapse and boom-bust cycles of aggregate markets such as residential housing were not adequately kept in check, in that, profits were privatized and losses were eventually socialized, resulting in great misallocation of resources, in a leveraged manner, to chasing a limited asset-class. Government-sponsored enterprises or state-owned banks were part of this excess - often explicitly required by governments to do so, but private sector financial firms also engaged in significant leverage and risk-taking. Declining growth in Western economies and availability of global surpluses to fund their fiscal deficits also contributed to the excess. But in one line, externalities or spillover effects from financial sector and housing sector meltdown were ignored through weakening of regulations, and in some cases their build-up was even explicitly encouraged for populist goals.
- Donald RappStarting with the great stock bull market of 1982 to 1999, proceeding through the dot.com balloon, and thence to the housing bubble of 2002-2007, and finally the stock bull market of 2009-2011, we have become too reliant on paper assets (rather than earnings from work) as a source of wealth. We keep bidding up paper assets (mainly real estate and stocks) to outrageous levels thinking that this is a real source of wealth – until they collapse of their own weight. This sawtooth pattern of overbuying and overselling leads to excessive spending during boom times and reluctance to pull back during slack times, further exacerbating the debt problem. The growth of stock prices has hugely outpaced the growth of productivity and production. Governments aid and abet bubble formation through fiscal policies and lack of regulation, because they want to get reelected and people are happier while bubbles are expanding (additional response here).
- Robert HardawayIn each chapter of my book I focused on government policies as the primary cause of the housing bubble: the CRA (which not only affected those financial institutions directly regulated by CRA, but set the example for other institutions not directly regulated by it); Clinton regulations promulgated in the 1990's threatening to punish banks which did not lend to subprime borrowers; securitization of mortgages by Fannie Fae and Freddie Mac, setting the example for private financial institutions to follow suit by devising increasingly complex and risky investment vehicles; mortgage subsidies to the richest one third of Americans via the mortgage tax deduction; local exclusionary rules and zoning regulations which cause housing prices to skyrocket, particularly in California; federal reserve interest rate policies designed to perpetuate the housing bubble; the decision to delete housing prices from the CPI in an effort to camouflage the effects or rising housing prices on the CPI. While other causes were discussed (banking, realtor, appraisal, and accounting policies), they were discussed in the context of reaction to byzantine government regulations.
- Isaac GradmanThe roots of the mortgage crisis took hold after the collapse of high-tech stocks in 2000, when the stock market crashed that year. The Fed cut interest rates (which caused a corresponding decrease in mortgage rates) and held rates at rock-bottom levels for an extended period even after the recovery. Home prices appreciated and the economy grew as new home buyers, speculators, and refinancing activity rose, while the cost of financing a home was dropping. Low interest rates and the resulting wave of mortgage prepayments in the early 2000s (generating huge profits for investors in subordinate mortgage backed securities) generated an insatiable appetite by institutional investors for additional mortgage credit risk. Wall Street responded by expanding its capacity to meet the oversized demand for housing, both by encouraging existing borrowers to refinance and by making loans to borrowers who previously could not qualify. After a few years, common sense began to take hold and eventually, rationality returned. When this unprecedented run of home price appreciation came to end and home prices finally leveled off, borrowers could not make their mortgage payments, refinance, or recoup the unpaid principal balances of their loans by selling. Those who had enough equity in their homes to try to sell rushed to do so, causing a flood of houses on the market. Soon, the supply of houses for sale exceeded the number of potential buyers. Once it was clear that millions of mortgages would not be paid off, panic gripped the financial markets, and the mortgage crisis of 2007 was in full swing.
- Edward PintoThe major cause of the financial crisis in the U.S. was the collapse of housing and mortgage markets resulting from an accumulation of an unprecedented number of weak and risky Non-Traditional Mortgages (NTMs). These NTMs began to default en mass beginning in 2006, triggering the collapse of the worldwide market for mortgage backed securities (MBS) and in turn triggering the instability and insolvency of financial institutions that we call the financial crisis. Government policies forced a systematic industry-wide loosening of underwriting standards in an effort to promote affordable housing. This paper documents how policies over a period of decades were responsible for causing a material increase in homeowner leverage through the use of low or no down payments, increased debt ratios, no loan amortization, low credit scores and other weakened underwriting standards associated with NTMs. These policies were legislated by Congress, promoted by HUD and other regulators responsible for their enforcement, and broadly adopted by Fannie Mae and Freddie Mac (the GSEs) and the much of the rest mortgage finance industry by the early 2000s. Federal policies also promoted the growth of over-leveraged loan funding institutions, led by the GSEs, along with highly leveraged private mortgage backed securities and structured finance transactions. HUD’s policy of continually and disproportionately increasing the GSEs’ goals for low- and very-low income borrowers led to further loosening of lending standards causing most industry participants to reach further down the demand curve and originate even more NTMs. As prices rose at a faster pace, an affordability gap developed, leading to further increases in leverage and home prices. Once the price boom slowed, loan defaults on NTMs quickly increased leading to a freeze-up of the private MBS market. A broad collapse of home prices followed.
- Laurence Siegel (more than one paragraph - see link)
Compiled by Gary Karz, CFA
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