Academic

Why Was There A Crisis? Views from the Finance Professoriate

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

A stimulating conference on the performance of financial intermediaries (that's banks and shadow banks) during the crisis reminded me that a number of finance scholars largely agree on some of the basics of what happened.  Legal scholars and bloggers have expressed no such consensus, perhaps because we are focused on institutions and laws, such as was it compensation practices?  Regulators asleep on the job?  Credit rating agencies?  And so on.

All of these institutions probably played a role, of course, but many economists would probably put much of the blame where, it seems to me, it must belong: in the markets.  And in those markets, banks and shadow banks kept risky assets on their books, rather than selling them on to the greater fool.  When the asset values collapsed, there was an old-fashioned run on the shadow banks, and a serious impact on the solvency of the banks.

So I thought I'd do a couple of posts on this, ventriloquizing what I've heard - there's no creativity here - so that the wise readers of this here website can consider these issues. But the market failures raise three questions.  First, why did the banks keep the risky assets?  Second, why was there a bank run in the shadow banking sector?  And third, what should be done to prevent these sorts of market failures from happening again?

Full post as published by Conglomerate on September 01, 2009 (boomark / email).