The Political, Regulatory and Market Failures That Caused the US Financial Crisis
This paper discusses the key regulatory, market and political failures that led to the 2008-2009 United States financial crisis. While Congress was fixing the Savings and Loan crisis, it failed to give the regulator of Fannie Mae and Freddie Mac no...
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| Language: | English |
| Published: |
2012
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| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100527154732 http://hdl.handle.net/10986/3810 |
| Summary: | This paper discusses the key regulatory,
market and political failures that led to the 2008-2009
United States financial crisis. 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 appealing to
narrow constituencies. In the mid-1990s, to encourage home
ownership, the Administration changed enforcement of the
Community Reinvestment Act, effectively requiring banks to
lower bank mortgage standards to underserved areas.
Crucially, 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. The author
explains that financial deregulation of the past three
decades is unrelated to the financial crisis, and makes
several recommendations for regulatory reform. |
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