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Views on the origins of the current economic crisis

Uzzy

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Uzzy
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Feb 18, 2007
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Right. In my history course, we are discussing the Making of the Contemporary World, and more specifically at the moment, the current financial crisis and why it occurred. We have to gather together some views on why it happened, looking at various news and newspapers to discover these. Now, this is easy enough for me in the UK, given that I know what papers I can rely on for quality opinion but I was hoping that there might be some more global perspectives out there that I could tap into, to broaden my understanding of it.

Some links to articles from US and European papers discussing the origins of this crisis would be most appreciated, if people had the time to help me out. Thanks in advance for any aid. :)
 
I'm not doing your homework for you, but "This American Life" (a NPR radio show) did an excellent series recently, if you just want the basic story. I would look at The Wall Street Journal, Barrons, and Forbes for US print sources. For TV I guess CNBC would be the place to look, though I personally have mixed feelings about their coverage. I list these because they are major sources in the US, endlessly quoted and referred to.

I think pretty much everyone agrees about the major elements of what happened; where you will find major differences of opinion is how/whether regulation should be changed to prohibit this sort of thing in the future, how/whether it could have been made better in the short run, whether it could be predicted, etc.

Oh, Warren Buffett opined a fair amount about it while it was going on, look for
Becky Quick interviews with him on CNBC. He's often a contrarian - a good foil for the larger media outlets.

You can't leave out Greenspan's "discovery" that markets aren't always rational. Ye Gods, ya think??? Anyway, just googling him brings up a ton of stuff back to 2007 up to the present moment on his personal opinion on the causes (not his fault, in sound bite format). It should give you plenty of material for compare/contrast.

edit: since this is a history course, rife with postdiction, I think it would be fascinating to look at some predictions. The book Irrational Exhuberence bym Yale professor Shillerm predicted the housing bubble in the second edition (the first edition predicted the collapse of the tech bubble - which happened just a few days after the book was released). Buffett was on record talking about the out of control financial instruments (though I don't recall him talking about a crisis of this magnitude specifically in reference to CDOs, only generally about derivates). Nassim Taleb, quite a contrarian, laid out the entire credit crisis in one of his books, probably the black swan. There are plenty of interviews of him after the event on the web, which should trace you back to the source. Those three are pretty big names, and should give you tons of material. Heck, if you want to go to pop culture, Jim Cramer on CNBC was literally screaming on TV at anyone who would listen that this was going to happen (after it already started, to be sure).
 
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The most basic cause is that the system being used to account for risk was flawed. Financial companies invented complex ways to distribute risk, which isn’t bad in itself because larger risk pools do reduce the day to day cost of risk. The problem is that no one truly owned this shared risk pool, rather it became a part of the system in general. This meant that lenders could trade personal risk they did own for systemic risk that wasn’t on their books.

This created a sort of “tragedy of the commons” scenario where it became advantageous to pollute the common risk pool by taken on high risk high reward ventures and then shuffling the risk off to the common pool.

This is why the sub-prime loan market exploded. Normally lenders needed to be very cautions about this type of because they needed to pay for the cost of failed loans, but under the new system they could unload that cost into the common pool but keep a share of the additional profits. Instead of being encouraged the be cautions of such loans, lenders now had a strong incentive to seek them out and even sell risky loans to people who could easily afford a much safer vehicle.

This money flowing into the housing market created a bubble, and when this bubble popped all that pooled risk turned negative at once. This systemic risk wasn’t owned by any individual institution and no single institution was anywhere near large enough to absorb the cost so the cost was pushed back onto the books of every financial institution, even the ones who were not creating the risk to begin with.

Since business is complexly dependant of financial institutions for their day to day business the problem ultimately trickled down to them even though they had nothing at all to do with the original problem.
 
If you're interested, there's a great online educational foundation on Youtube called, khanacademy (Khan Academy).

Sal Khan explains the entire crisis, and goes through, visually, what a mortgage-backed security and collateralized debt obligation is.

The great thing about these videos is that they're all about 12 minutes long, and there are probably 20 or so in the "Credit Crisis" section, and he starts from the beginning as if you have ZERO information. So if you feel you can skip ahead a few videos, just watch the first few minutes, and then either skip to the next or keep watching.

He's a great teacher, and it's all of course, free on youtube.

There's actually a lot of great courses there besides the credit crisis one.

http://www.youtube.com/khanacademy
 
I really liked this passage from an article called "The Death of Kings" in the May 18th issue of The New Yorker encapsulated things nicely:

The crisis is the culmination of events and trends reaching back, depending on your perspective, four, seven, seventeen, twenty-two, twenty-seven, thirty-eight, sixty-five, or a hundred and two years. The sub-prime mortgage meltdown, the subsequent collapse of the wider real estate market and then of securities based on real estate, and of the firms and funds holding those securities, and of the companies selling insurance against the failure of those firms, and, potentially, of the insurer's counterparties, and so on: you could say that all this is merely the finale to a multi-decade saga set on Wall Street and Main Street, in Washington, Riyadh and Tokyo. The causes are technological, mathematical, cultural, demographic, financial, economic, behavioral, legal, and political. Among the dozens of contributors and culprits, real or perceived, are the personal computer, the abandonment of the gold standard, the abandonment of Glass-Steagall, the end of fixed commissions, the ratings agencies, mortgage-backed securities, securitization in general, credit derivatives, credit-default swaps, Wall Street partnerships going public, the League of Nations, Bretton Woods, Basel II, CNBC, the S.E.C., disintermediation, overcompensation, Barney Frank and Chris Dodd, Phil Gramm and Jim Leach, Alan Greenspan, black swans, lax enforcement, government pressure to lower lending standards, predatory lending, mark-to-market accounting, hedge funds, private-equity firms, modern finance theory, risk models, "quants", corporate boards, the baby boomers, flat-screen televisions and an indulgent, undereducated populace. All these factors, very few of them mutually exclusive, conspired to make possible skyrocketing leverage, misperceived risk, and spectacular collapse. To tell the story of them all, in the proper context and detail, will require an Edward Gibbon. The fall of Rome, by comparison, was a local event. Much abridged, a few familiar words will do: debt, greed, hubris.​
Im not sure this is online I had actually typed this out previously..:)
 
My opinion is that it's an intersection between these explanations:

The always excellent econtalk podcast: http://www.econtalk.org/archives/2009/10/calomiris_on_th.html

William black of well deserved S&L crisis fame: http://www.informationclearinghouse.info/article23243.htm

My take is that you can't have a mismatch between risk-avoidance and greed. If government steps in and removes risk-avoidance with deposit insurance, an unwillingness to investigate and prosecute fraud and the greenspan-put(the implicit understanding that you will be bailed out if you fail); then you must have the government come in and not only regulate but actually direct investments to a signficant extent.

The loose monetary policy of greenspan provided the necessary fuel for the internet and housing bubbles.
 
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roger said:
IFor TV I guess CNBC would be the place to look, though I personally have mixed feelings about their coverage.
Click to expand...


PBS' Frontline program has done at least one episode detailing the financial debacle.
 
Thanks for the help guys. Getting an American perspective on it seemed to impress my professor.
 
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