Lessons from the North Atlantic financial crisis

Global Finance in Crisis: The politics of …, 2010

What began in the summer of 2007 as a problem in a relatively unknown segment of the US housing finance market has very quickly turned into the most severe global financial crisis since the 1930s. The impact of this crisis has escalated far beyond its point of origin, affecting countries around the world, and spilling over from the financial system into the real economy.

2010

International Critical Thought, 2012

The regulation or non-regulation of finance and its extent and forms has always been an issue in capitalism’s historical course. This is a crucial issue for the system’s modus operandi since in capitalism money (and its provision, i.e. finance) operates as capital (i.e. provider of means for entrepreneurial activities), whereas its importance in previous socioeconomic systems was significantly lesser. This paper argues that there is an inherent unsolvable contradiction between capitalism’s tendency to unleash finance and its tendency to reign on its instabilities. The paper argues that although the crisis signifies the need of re-regulation, there are significant vested interests that deny it. The rampant internationalization of money and capital markets in recent decades has created a global power structure in favour of internationalized finance. This global power structure promoted national reforms that curtailed regulation and led to extreme open-market practices (i.e. the model of private banking). The crisis signified the failure of this model. However, international finance’s global power remains and thus blocks any moves to circumvent it. The paper ends with a call for public banking as a means of reforming the financial aspects of the current crisis to the benefit of labour.

2009

The financial turmoil that originated in 2007 and developed into an unprecedented crisis battering financial and real markets is the latest manifestation, on a grand scale and with new attributes, of a welldefined pathology in the process of market liberalization and integration in the post-Bretton Woods era. At the root of the crisis lies a fundamental inconsistency between financial globalisation

xa.yimg.com, 2012

The regulation or non-regulation of finance and its extent and forms has always been an issue in the historical development of capitalism. This issue is crucial for the system's modus operandi since in capitalism money (and its provision, i.e. finance) operates as capital (i.e. the provider of the means for entrepreneurial activities), whereas its importance in previous socioeconomic systems was significantly less. This paper argues that there is an inherent insoluble contradiction between capitalism's tendency to unleash finance and its need to rein in the resulting instabilities. The paper argues that although the crisis shows the need for re-regulation, there are significant vested interests that deny this need. The rampant internationalization of money and capital markets in recent decades has created a global power structure that favours internationalized finance. This global power structure has promoted national reforms that have curtailed regulation and led to extreme open-market practices (i.e. the model of private banking). The crisis signifies the failure of this model. However, the global power of international finance remains and thus blocks any moves to circumvent it. The paper ends with a call for public banking as a means of reforming the financial aspects of the current crisis to the benefit of labour.

Global Policy, 2010

Recent events have once again highlighted weaknesses in the global regulatory system. The highly complex network of bodies overseeing different parts of the financial markets failed to identify or respond to the macro trends that led to the crisis. There was too little capital in the banking system. There is also a serious accountability gap, with regulatory bodies free to work to their own timetables. And the links between macroeconomic policy makers in finance ministries and central banks, on the one hand, and regulators on the other, have been too weak. The changes made so far by the G20 summits are very modest and are unlikely to correct these flaws. There remains a particular problem in the European Union, where the crisis has shown that the single financial market requires more central coordination of regulation than the politicians have so far accepted. There remains, therefore, much unfinished business in financial regulatory reform.

IMF Working Papers, 2014

We identify current challenges for creating stable, yet efficient financial systems using lessons from recent and past crises. Reforms need to start from three tenets: adopting a system-wide perspective explicitly aimed at addressing market failures; understanding and incorporating into regulations agents' incentives so as to align them better with societies' goals; and acknowledging that risks of crises will always remain, in part due to (unknown) unknowns-be they tipping points, fault lines, or spillovers. Corresponding to these three tenets, specific areas for further reforms are identified. Policy makers need to resist, however, fine-tuning regulations: a "do not harm" approach is often preferable. And as risks will remain, crisis management needs to be made an integral part of system design, not relegated to improvisation after the fact.

European Journal of Economics and Economic Policies: Intervention, 2021

The pervading climate of financial innovation coupled with stagnant regulation of the 1990s and early 2000s led to one of the greatest financial crises on record: the 2007-2009 US financial meltdown, which quickly propagated to other financial centers and initiated what has been called the Great Recession. Between 2007 and 2009 a great many national economies experienced recession. Many issues were involved in the run-up to this highly complex phenomenon. Victor Beker's book has the virtue of analysing each of these issues in the light of the sizable amount of research undertaken before, during, and especially after the crisis. It also addresses the changes brought about since then in legislation and regulation both in the US and internationally. Furthermore, it poses the difficult question of whether such changes can give us confidence that another such great crisis and recession is not forthcoming. And the answer is negative, since '[l]egislation has not eliminated incentives to take risks that would be excessive from a social perspective' (p. 143). The book describes the development of the financial meltdown and analyses each of the many topics that were involved in this complex crisis, including (i) the role of expectations ('irrational expectations' in the housing price bubble and panics), and the lack of appropriate regulations addressing (ii) the securitization innovation process, (iii) the actions of non-bank financial intermediaries (or the 'shadow banking system'), and (iv) the actions of credit-rating agencies. Each of these topics is addressed from different angles, among many others. A critical issue was the growth of the sub-prime mortgage market from the early 1990s through Fannie Mae and Freddie Mac and the fact that the government sponsorship of these institutions created the belief that there was an implicit government guarantee of the loans generated. The development of securitization was the means through which the banks originating the loans could earn profits but shift the risks to the final purchasers of the securities. In this process investment banks played a critical role, purchasing the mortgages and packaging them into highly opaque securities to be sold mainly to institutional investors. Further combustion was added by the fact that rating agencies were eager to grant high ratings in order to earn more fees from the issuers of the securities, facing no meaningful downside risk if their evaluations eventually turned sour. As Beker observes: The interaction of these four factorsirrational expectations, securitization, shadow banking, and credit rating agenciesled to the subprime mortgage crisis. When house prices started falling most borrowers who could not afford their monthly payments had no alternative but to default their subprime mortgages; many of them found themselves holding mortgages in excess

2010

Explanations, necessity, and policy …, 2008

1) The threat of instability due to securitization at the meso-economic level. By most observers of the crisis the specification of the transformation of a credit contract into an asset is seen as one of the major sources of financial instability. As a consequence we provide a detailed account of this process showing that it is the network character and the involvement of meso-economic characteristics of these networks (the structure of network links as well as the emerging incentive structure of agents) which has to be held responsible for securitization threats.