Factors Contributing to the 2008 Global Financial Crisis
Please rate the importance (0=none; 5= highest) of each item below (presented to panelists in randomized order) in contributing to the 2008 global financial crisis.
The following items were presented to panelists in randomized order.
Inadequate or flawed regulation, supervision, or both with respect to the financial sector (which includes financial infrastructure, banks, shadow banks, and interconnections in the system)
Underestimation of the riskiness of securities created with financial engineering
Bad incentives, fraud, or both in mortgage issuance and securitization
Flawed Financial Sector Regulation and Supervision
1
B.
Underestimated Risks (Financial Engineering)
1
C.
Mortgages: Fraud and
Bad Incentives
3
D.
Funding Runs (ST Liabilities)
0
E.
Rating Agency Failures
1
F.
Housing-Price Beliefs
5
G.
Household Debt Levels
0
H.
Too-Big-To-Fail Beliefs
0
I.
Government Subsidies: Mortgages, Home Owning
0
J.
Savings and Investment Imbalances
0
K.
Loose Monetary Policy
1
L.
Fair-Value Accounting
0
7
This list seems rather unbalanced towards the banking sector and away from the real side of the economy. House prices went too high, and then collapsed and the economy followed. I think amplifying this I would also add uncertainty – my pet peeve.
Flawed Financial Sector Regulation and Supervision
5
B.
Underestimated Risks (Financial Engineering)
5
C.
Mortgages: Fraud and
Bad Incentives
1
D.
Funding Runs (ST Liabilities)
No Opinion
E.
Rating Agency Failures
5
F.
Housing-Price Beliefs
2
G.
Household Debt Levels
2
H.
Too-Big-To-Fail Beliefs
2
I.
Government Subsidies: Mortgages, Home Owning
2
J.
Savings and Investment Imbalances
No Opinion
K.
Loose Monetary Policy
1
L.
Fair-Value Accounting
No Opinion
7
TBTF is tricky. Banks had far too little equity for –‘ve shocks, prob b/c they underestimated shock risks. TBTF beliefs could have driven this. But top mgrs likely to lose jobs if rescued, so hard to believe they gambled BECAUSE they expected rescue.
Flawed Financial Sector Regulation and Supervision
5
B.
Underestimated Risks (Financial Engineering)
5
C.
Mortgages: Fraud and
Bad Incentives
5
D.
Funding Runs (ST Liabilities)
4
E.
Rating Agency Failures
5
F.
Housing-Price Beliefs
5
G.
Household Debt Levels
5
H.
Too-Big-To-Fail Beliefs
3
I.
Government Subsidies: Mortgages, Home Owning
1
J.
Savings and Investment Imbalances
2
K.
Loose Monetary Policy
2
L.
Fair-Value Accounting
2
6
The interplay between ever rising house prices (with extrapolative expectations on future increases), a broken Financial Engineering technology leading to excessive credit access and ridiculously lax capital requirements for banks led to build up and bust.
Max Planck Institute for Research on Collective Goods
A.
Flawed Financial Sector Regulation and Supervision
5
B.
Underestimated Risks (Financial Engineering)
5
C.
Mortgages: Fraud and
Bad Incentives
5
D.
Funding Runs (ST Liabilities)
4
E.
Rating Agency Failures
5
F.
Housing-Price Beliefs
5
G.
Household Debt Levels
5
H.
Too-Big-To-Fail Beliefs
2
I.
Government Subsidies: Mortgages, Home Owning
1
J.
Savings and Investment Imbalances
2
K.
Loose Monetary Policy
1
L.
Fair-Value Accounting
4
9
This was tremendous market failure, facilitated by bad regulation and weak supervision. TBTF was less important because they never thought of failing. Global interconnectedness, direct or through market prices, should als be high on the list. -see background information here and here.
Flawed Financial Sector Regulation and Supervision
4
B.
Underestimated Risks (Financial Engineering)
5
C.
Mortgages: Fraud and
Bad Incentives
4
D.
Funding Runs (ST Liabilities)
5
E.
Rating Agency Failures
5
F.
Housing-Price Beliefs
3
G.
Household Debt Levels
2
H.
Too-Big-To-Fail Beliefs
1
I.
Government Subsidies: Mortgages, Home Owning
1
J.
Savings and Investment Imbalances
2
K.
Loose Monetary Policy
2
L.
Fair-Value Accounting
0
8
Reckless risk taking by bankers reflected hubris, distorted incentives, over-confidence in risk management techniques and disaster myopia. Regulators were complacent, Easy money and savings glut were merely the macro background context.
Flawed Financial Sector Regulation and Supervision
1
B.
Underestimated Risks (Financial Engineering)
4
C.
Mortgages: Fraud and
Bad Incentives
4
D.
Funding Runs (ST Liabilities)
3
E.
Rating Agency Failures
3
F.
Housing-Price Beliefs
1
G.
Household Debt Levels
2
H.
Too-Big-To-Fail Beliefs
3
I.
Government Subsidies: Mortgages, Home Owning
2
J.
Savings and Investment Imbalances
1
K.
Loose Monetary Policy
1
L.
Fair-Value Accounting
No Opinion
7
Regulating financial markets is in principle important but very difficult. One, it is hard to figure out what “frictions” to focus on (some of which are government-induced). Two, financial institutions will adapt to avoid any restrictions…
Flawed Financial Sector Regulation and Supervision
5
B.
Underestimated Risks (Financial Engineering)
4
C.
Mortgages: Fraud and
Bad Incentives
3
D.
Funding Runs (ST Liabilities)
No Opinion
E.
Rating Agency Failures
3
F.
Housing-Price Beliefs
3
G.
Household Debt Levels
4
H.
Too-Big-To-Fail Beliefs
3
I.
Government Subsidies: Mortgages, Home Owning
No Opinion
J.
Savings and Investment Imbalances
4
K.
Loose Monetary Policy
3
L.
Fair-Value Accounting
No Opinion
5
Sophisticated financial instruments can improve the efficiency of financial markets and need not be destabilizing. But regulators should ensure that their ultimate asset base is transparent and that holders have adequate margins.
Flawed Financial Sector Regulation and Supervision
5
B.
Underestimated Risks (Financial Engineering)
5
C.
Mortgages: Fraud and
Bad Incentives
5
D.
Funding Runs (ST Liabilities)
4
E.
Rating Agency Failures
5
F.
Housing-Price Beliefs
3
G.
Household Debt Levels
4
H.
Too-Big-To-Fail Beliefs
5
I.
Government Subsidies: Mortgages, Home Owning
4
J.
Savings and Investment Imbalances
1
K.
Loose Monetary Policy
5
L.
Fair-Value Accounting
0
4
Several of the above items are different facets of the same phenomenon, rather than alternative factors. E.g. bad incentives in mortgage issuance and Financial Engineering & failures by Rating Agency Failures; or TBTF & flawed Flawed Financial Sector Regulation and Supervision.
Flawed Financial Sector Regulation and Supervision
5
B.
Underestimated Risks (Financial Engineering)
4
C.
Mortgages: Fraud and
Bad Incentives
4
D.
Funding Runs (ST Liabilities)
4
E.
Rating Agency Failures
3
F.
Housing-Price Beliefs
4
G.
Household Debt Levels
2
H.
Too-Big-To-Fail Beliefs
5
I.
Government Subsidies: Mortgages, Home Owning
1
J.
Savings and Investment Imbalances
5
K.
Loose Monetary Policy
3
L.
Fair-Value Accounting
1
8
Many factors contributed to the 2008 global financial crisis. But at the heart of the mechanism was a dysfunctional financial sector with misallocation of capital, bad incentives, insufficient supervision and some fraudulent behaviour.
Flawed Financial Sector Regulation and Supervision
5
B.
Underestimated Risks (Financial Engineering)
5
C.
Mortgages: Fraud and
Bad Incentives
4
D.
Funding Runs (ST Liabilities)
4
E.
Rating Agency Failures
4
F.
Housing-Price Beliefs
4
G.
Household Debt Levels
4
H.
Too-Big-To-Fail Beliefs
4
I.
Government Subsidies: Mortgages, Home Owning
0
J.
Savings and Investment Imbalances
3
K.
Loose Monetary Policy
1
L.
Fair-Value Accounting
3
7
Financial regulation was the major problem . Reforms have helped stabilize & it’s important that US does not roll them back (see Yellen’s 2017 speech in Jackson Hole) -see background information here
Flawed Financial Sector Regulation and Supervision
5
B.
Underestimated Risks (Financial Engineering)
5
C.
Mortgages: Fraud and
Bad Incentives
4
D.
Funding Runs (ST Liabilities)
5
E.
Rating Agency Failures
5
F.
Housing-Price Beliefs
3
G.
Household Debt Levels
3
H.
Too-Big-To-Fail Beliefs
2
I.
Government Subsidies: Mortgages, Home Owning
2
J.
Savings and Investment Imbalances
2
K.
Loose Monetary Policy
2
L.
Fair-Value Accounting
0
8
Leverage was grossly excessive, making the system too fragile to withstand the shock of the subprime crisis and its effects on property prices and associated derivatives.
Flawed Financial Sector Regulation and Supervision
5
B.
Underestimated Risks (Financial Engineering)
2
C.
Mortgages: Fraud and
Bad Incentives
2
D.
Funding Runs (ST Liabilities)
2
E.
Rating Agency Failures
3
F.
Housing-Price Beliefs
2
G.
Household Debt Levels
2
H.
Too-Big-To-Fail Beliefs
2
I.
Government Subsidies: Mortgages, Home Owning
1
J.
Savings and Investment Imbalances
2
K.
Loose Monetary Policy
2
L.
Fair-Value Accounting
7
Ultimately, the global financial crisis reflected poor regulation and supervision of the banking sector. The other items listed are just factors that regulators should have been taking into account or paying better attention to.