There appears to be some ignorance masquerading as certainty floating around here. In the interest of reducing ignorance and increasing humility, here are some educational papers.
The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong John B. Taylor http://www.stanford.edu/~johntayl/FCPR.pdf | In this paper I have provided empirical evidence that government | actions and interventions caused, prolonged, and worsened the | financial crisis. They caused it by deviating from historical | precedents and principles for setting interest rates, which had worked | well for 20 years. They prolonged it by misdiagnosing the problems | in the bank credit markets and thereby responding inappropriately | by focusing on liquidity rather than risk. They made it worse by | providing support for certain financial institutions and their | creditors but not others in an ad hoc way without a clear and | understandable framework. While other factors were certainly at play, | these government actions should be first on the list of answers to the | question of what went wrong. Causes of the Financial Crisis Viral V. Acharya and Matthew Richardson http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/acharya_richardson_critical.pdf | ABSTRACT: Why did the popping of the housing bubble bring the | financial system—rather than just the housing sector of the | economy—to its knees? The answer lies in two methods by which | banks had evaded regulatory capital requirements. First, they | had temporarily placed assets—such as securitized mortgages— | in off-balance-sheet entities, so that they did not have to hold | significant capital buffers against them. Second, the capital | regulations also allowed banks to reduce the amount of capital | they held against assets that remained on their balance sheets— | if those assets took the form of AAA-rated tranches of securitized | mortgages. Thus, by repackaging mortgages into mortgage-backed | securities, whether held on or off their balance sheets, banks reduced | the amount of capital required against their loans, increasing | their ability to make loans many-fold. The principal effect of this | regulatory arbitrage, however, was to concentrate the risk of mortgage | defaults in the banks and render them insolvent when the housing | bubble popped. THE REGULATED MELTDOWN OF 2008 Juliusz Jablecki and Mateusz Machaj | ABSTRACT: Capital regulations stemming from the Basel accords | created incentives for banks to securitize mortgages, even risky | ones; hold them at a correspondingly low Basel risk weight; or | shift them off of banks’ balance sheets to obtain even greater | leverage. Securitization was praised by economists and regulators for | dispersing risks to investors across the world, providing greater | resilience to the financial system. However, since in reality banks | tended to hold onto securitized assets—either on their balance | sheets or off of them, in off-balance-sheet entities—the accumulated | credit risk remained with the banks, especially in the “shadow | banking sector.” This explains the heightened vulnerability of the | financial system to a sudden collapse. The Credit Rating Agencies: Understanding Their Central Role in the Subprime Debacle of 2007-2008 Lawrence J. White http://w4.stern.nyu.edu/economics/docs/workingpapers/2009/credit%20rating%20agencies.critical%20review.revised%204-8-09.pdf | The three major credit rating agencies -- Moody's, Standard & Poor's, | and Fitch -- played a central role in the subprime mortgage debacle | of 2007-2008. That centrality was not accidental. Seven decades of | financial regulation propelled these rating agencies into the center | of the bond information market, by elevating their judgments about | the creditworthiness of bonds so that those judgments attained the | force of law. The Securities and Exchange Commission exacerbated this | problem by erecting a barrier to entry into the credit rating business | in 1975. Understanding this history is crucial for any reasoned debate | about the future course of public policy with respect to the rating | agencies. _______________________________________________ http://mccmedia.com/mailman/listinfo/brin-l_mccmedia.com
