Archive for February, 2009

Structural causes of the global financial crisis

This paper from University of Massachusetts focuses on the ultimate cause of the global financial crisis. It suggests that, the flawed institutions and practices of what is often referred to as the New Financial Architecture (NFA), the globally integrated system of bank conglomerates and the so-called ‘shadow banking system’ of hedge funds, investment banks, and special investment vehicles, are responsible for the global financial crisis.

It traces the evolution of NFA and discusses its structural flaws. Key issues covered are: (i) that the efficient capital markets theory accepted by regulators, even though weak, is misleading; (ii) the incentives embedded in the NFA, which lead to excessive risk taking; (iii) that mortgage-backed securities, central to the current boom, are too complex to have been priced right, and that they thus eventually collapsed when the boom-time optimism faded; and (iv) a high generation of leverage by the NFA.

Paper can be found here