What were the primary causes of Global Financial Crisis?
- Nye LavalleGreed, ignorance, arrogance, and international bankers.
- Phillip AndersonThe capitalization of the economic rent into a tradable privilege, permitted to then have credit created upon this capitalized value.
- Peter TanousThe single biggest cause of the crisis was the decline in home prices and the belief that home prices never decline (because in the history of the United States it had never happened before).
- Fred HarrisonAll sections of society conspire to reinforce a financial system that fosters public and private indebtedness. Credit is a collateral consequence of an irresponsible public revenue system than penalizes work and saving and rewards investments in land-based assets.
- John TrainMy first book, Dance of the Money Bees, describes our swarming instinct, which is like the bees' swarming instinct: irresistibly powerful. Like gambling, like love. So who's responsible? Human nature. The other factors, the government, Wall Street, are just enablers.
- Robert LitanToo much subprime lending, aggravated by excessive leverage in commercial and investment banks. Both market forces and regulatory failures contributed to both problems. And too much pressure by Congress and Presidents of both parties over the years on the GSEs to buy/guarantee securities backed by less-than-prime mortgages.
- Kevin DowdTwo idealogical causes: interventionist economics (esp. managed economy stuff, Keynesianism) and modern finance. I regard both as essentially alchemical, i.e., more or less consistent bodies of thought, but based on misconceived assumptions. The latter gave idealogical cover to the deterioration of modern capitalism into what is now clearly cronyism.
- 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.
- Richard RollThe reduction in the value of human capital that was precipitated by a decrease in the anticipated worldwide growth rate in wages, which was itself induced by a growing expectation that the public sector was growing globally relative to the private sector. This happened in early 2007, I think. The reduction in human capital value caused a decline in real estate values globally.
- Michael Lim Mah-HuiPrimary causes of crisis must be understood at three levels : (i) faulty theory and methodology of rational expectation and market efficiency schools; (ii) financial deregulation and financial malpractices; (iii) three macro-economic structural imbalances and their interaction - current account imbalance; imbalance between financial sector and real economy; wealth and income imbalance.
- Yalman OnaranToo many people borrowed too much that they couldn't pay back. Too many banks facilitated this lending while being part of the borrowing binge themselves. Because the banks, consumers and companies had too much leverage and very thin capital to protect themselves, a drop in prices could bring the whole house of cards down. Then governments took on some of the debt to "fix" the problem, but this has only shifted the problem from private balance sheets to public ones. So it's the turn of countries to blow up.
- Johan LybeckThe bubble in housing markets in some Anglo-Saxon countries (US, UK, Australia) as well as well as Spain and Denmark, in combination with greedy bankers and investment bankers, overworked and incompetent supervisors, faulty econometric models of measuring risk in complex instruments in banks as well as rating institutes, naďve and greedy investors such as the German Landesbanken and many others (what business and competence had the Agricultural Bank of China selling CDS protection on the Icelandic Kaupthing Bank?).
- Robert RodriguezThe proximate cause was the Federal Reserve's unwise and unsound policy, along with regulatory roles which allowed credit to blossom. Wall Street ran with it and the private side took that flexibility in excess and supercharged it (yet the fed did not recognize it). Before the crisis, Bernanke believed there would be no contagion and subprime was a small area. In a 2007 speech, Absence of Fear, I argued that subprime credit was the canary in the credit coal mine and we had a major problem. Soon thereafter the Fed was taking extraordinary actions.
- Matthew LynnIt was, and still is, primarily a debt crisis. Debt levels have been rising steadily right across the developed world for the last three decades, and by 2008 had reached a point where they were unsustainable. There were two reasons for that build up of debt. One was the severing of the final link between the monetary system and gold in 1971, and the creation of a system of pure fiat money. The second was an intellectual climate created by neo-Keynesian economists who believed debt didn’t matter. That spread to regulators and politicians – and the result was the mess we have now.
- Les LeopoldThe crisis was caused by a combination of financial deregulation and too much money in the hands of the few (due to dramatic changes in the tax code). An unfettered Wall Street created a wide variety of new financial instruments to suck up this excess capital. Much of it turned out to be enormously risky and ultimately turned into toxic assets. A key element was the ability to build a massive set of new securities upon sub-prime loans which in turn pumped up a housing bubble. When housing prices leveled off, the assets based upon them collapsed. The financial markets froze and a crash ensued. The same two conditions -- financial deregulation and excessive money in the hands of the few -- also were key factors in the 1929 crash.
- Jay W. RichardsThe primary causes of the financial crisis, as opposed to contributing factors, mere necessary conditions, and amplifiers (such as certain mortgage-backed securities fed into global securities markets), was the convergence of incentives created by a variety of federal affordable housing goals, with Fed policy and an implicit "Too Big to Fail" assumption in some large institutions playing key supporting roles. These created massive demand for risky loans, scrambled normal market signals, and the various actors with the relevant markets responded, mostly rationally, to those incentives. The capricious bailout policies of the US Treasury in 2008 vastly contributed to the market panic of September 2008. In explaining the actions of some investment banks and rating agencies, an additional assumption played a key role: namely, that the housing market in the U.S. would not drop nationwide at the same time.
- Francis LongstaffThe Federal Government has pursued a number of poor policies over the past several decades that have created many distortions and perverse incentives in the economy. Corporate tax policy gave firms incentives to leverage. Housing policy gave financial institutions incentives to lower underwriting standards and provide credit when they should not have done so. The current political leadership focuses on wealth transfers rather than wealth creation. The current crisis cannot be due soley to the effects of 2 trillion dollars of subprime losses. This would only cause a transfer of wealth. The current crisis is primarily due to the cumulative effects of toxic government policy which has destroyed 20 trillion in household wealth via the real estate and equity markets. When the government fails in its leadership role and provides bad incentives, one should not be surprised if everyone follows these bad incentives. The leader gets the lion's share of the blame (government), not the followers (Wall Street).
- Roddy BoydUltimately it had its terminal root in U.S. regulatory failure and the diminishment of corporate risk-management capabilities. In the U.S. domestically, the eradication of the Glass-Steagall Act in 1998 completely skewed the financial playing field to the commercial banks. Institutions that had no corporate history of managing dynamic (daily) capital markets risk were allowed to fund inventories of securities and loans at LIBOR or cheaper. With the standard quarterly earnings pressures, it became necessary to have massive exposure to “carry,” or higher-yielding bond assets that were funded cheaply. The initial easy profits of 02-05’s low rate-regime begat the drive to own conduits, structure securitized products in ever more esoteric fashions and above all, to own land. The only way the investment banks could compete was through leverage so Bear and Lehman ran their firms at between 30- and 40-times their equity capital base. So mid-2007 happens, Bear’s hedge fund collapses and UBS, to pick a name, began to liquidate nearly $100 billion in various mortgage loans and securities. Much hilarity did not ensue.
- Aaron BrownWhat we call the "global financial crisis" is better viewed as a transition away from a credit-money economy to a derivatives-based one. In the longest run, the cause is an improvement in financial technology, credit money would have been replaced eventually. In the shorter run, we can blame the crisis on the destruction of credit money by government actions starting with the monopolization of money issuance in the mid-1800s to throwing off the last vestiges of credit discipline in 1971. That ushered in a period of constant monetary crisis. In the shortest run, the primary cause was the creation of $5 trillion of balance of payment surpluses by China, Japan and oil exporters. The governments were unwilling to let their citizens control these surpluses, either to spend or to invest, and wanted to put them in foreign-denominated, short-term, low-risk securities. There weren't enough of those to go around, so financial engineers pretended to transmute local-denominated, long-term, risky securities. After that, the crash was inevitable.
- Clive BoddyGreed, unrestrained by conscience, and fueled by a totally ruthless, selfish and ambitious love of money, power and prestige, was the main cause of the crisis. This was enabled by the global trade in and use of financial derivatives which served no real economic or social purpose and which were seemingly designed for the sole purpose of inter-bank trade to generate paper revenue and therefore paper profits and therefore monetary bonuses. The financial products, such as Collateralized Debt Obligations of Asset Backed Securities ("CDOs of ABS"), were reportedly so complex that most traders did not understand them. This begs the question - what sort of person trades in multi-million dollar products that she or he does not understand? The answer must be at best a person who was just in it for the money and at worst a person totally without conscience, such as psychopaths are. These people without a conscience are about 1% of the total population and and have come to be called Corporate Psychopaths to differentiate them from their criminal peers. The realization that because of the numbers of people involved, Corporate Psychopaths must have been working in the financial services sector and the corporate banks in which the crisis was fostered was one of the considerations that led to the development of the Corporate Psychopaths Theory of the Global Financial Crisis. This is the theory that Corporate Psychopaths, through their example, leadership and influence on their peers in the financial services sectors, led, encouraged, facilitated, enabled and therefore, ultimately caused the crisis.
- Hersh ShefrinPsychological pitfalls generated the global financial crisis, which evolved in accordance with Minsky's script. Underlying Minsky's script is the psychological framework at the heart of behavioral finance. Minsky told us that economists have historically ignored the part of Keynes's theory that relates to the relationship between Wall Street and the overall economy. In this respect, McClean and Nocera's book All the Devils are Here point out that during 2003-2007, it was Wall Street that provided the financing for much of subprime mortgage origination, which it then securitized. Lying at the center of Minsky's analysis of what drives a financial crisis is financial innovation involving excessive Ponzi finance, meaning short-term lending by financial institutions against long-term cash flows that rely too heavily on price appreciation. In this respect, much of the mortgage lending associated with the housing bubble relied on house prices continuing to rise at rates that exceeded historical averages. Minksy argued that the financial sector is politically more agile and powerful than the regulators who oversee them, which is why the financial sector will ultimately win the regulatory game. In this respect, the passage of the Gramm–Leach–Bliley Act, also known as the Financial Services Modernization Act of 1999, and the political pummeling of CFTC chair Brooksley Born for having proposed increased scrutiny of derivatives trading are examples of end results favored by the financial sector. Minsky was also concerned that the Fed was overly focused on monetary policy at the expense of overseeing the quality of lending in financial markets. In this respect, during 2011 Fed chair Ben Bernanke made the same point, in describing lessons to be learned from the financial crisis. Underlying the complex Minsky dynamic are a series of critical psychological phenomena such as excessive optimism, overconfidence, confirmation bias, and aversion to a sure loss. These are manifest in asset bubbles, weak regulation, excessive leverage, excessive risk taking, and the shattered belief expressed by Alan Greenspan that self-interest can be relied upon to produce rational decisions.
- Ann Pettifor (more than one paragraph - see link)
Compiled by Gary Karz, CFA
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