The Political, Regulatory, and Market Failures That Caused the US Financial Crisis: What Are the Lessons?
The purpose of this paper is to discuss the key regulatory, market, and political failures that led to the 2008-2009 US financial crisis and to suggest appropriate recommendations for reform. The approach is to examine the underlying incentives that led to the crisis and to provide supporting data to support the hypotheses. While Congress was fixing the savings and loan crisis, it failed to give the regulator of Fannie Mae and Freddie Mac normal bank supervisory power. This was a political failure as Congress was using government sponsored enterprise (GSE) resources and the resources of narrow constituencies for their own advantage at the expense of the public interest. Second, in the mid-1990s, to encourage home ownership, the Administration changed enforcement of the Community Reinvestment Act, effectively requiring banks to use flexible and innovative methods to lower bank mortgage standards to underserved areas. Crucially, this disarmed regulators and the risky mortgage standards then spread to other sectors of the market. Market failure problems ensued as banks, mortgage brokers, securitizers, credit rating agencies, and asset managers were all plagued by problems such as moral hazard or conflicts of interest.
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| Format: | Journal Article biblioteca |
| Language: | EN |
| Published: |
2010
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| Subjects: | Financial Crises G010, General Financial Markets: Government Policy and Regulation G180, Banks, Other Depository Institutions, Micro Finance Institutions, Mortgages G210, Financial Institutions and Services: Government Policy and Regulation G280, |
| Online Access: | http://hdl.handle.net/10986/4976 |
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| Summary: | The purpose of this paper is to discuss the key regulatory, market, and political failures that led to the 2008-2009 US financial crisis and to suggest appropriate recommendations for reform. The approach is to examine the underlying incentives that led to the crisis and to provide supporting data to support the hypotheses. While Congress was fixing the savings and loan crisis, it failed to give the regulator of Fannie Mae and Freddie Mac normal bank supervisory power. This was a political failure as Congress was using government sponsored enterprise (GSE) resources and the resources of narrow constituencies for their own advantage at the expense of the public interest. Second, in the mid-1990s, to encourage home ownership, the Administration changed enforcement of the Community Reinvestment Act, effectively requiring banks to use flexible and innovative methods to lower bank mortgage standards to underserved areas. Crucially, this disarmed regulators and the risky mortgage standards then spread to other sectors of the market. Market failure problems ensued as banks, mortgage brokers, securitizers, credit rating agencies, and asset managers were all plagued by problems such as moral hazard or conflicts of interest. |
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