Hostname: page-component-cd9895bd7-fscjk Total loading time: 0 Render date: 2024-12-31T16:29:08.220Z Has data issue: false hasContentIssue false
  • English
  • Français

The Evolution of the Financial Crisis of 2007—8

Published online by Cambridge University Press:  26 March 2020

Ray Barrell  and
E. Philip Davis
Ray Barrell*
Affiliation:
National Institute of Economic and Social Research
E. Philip Davis*
Affiliation:
National Institute of Economic and Social Research and Brunel University
*
e-mail e-mail [email protected]
e-mail e-mail [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

The financial crisis that started in August 2008 has reached a climax in the autumn of 2008 with a wave of bank nationalisations across North America and Europe. Although banking crises are not uncommon, this is the largest since 1929–33. This paper discusses the build-up to the crisis, looking at the role of low real interest rates in stimulating an asset price bubble. That bubble was stocked by financial innovation and increases in lending. New financial products were not stress tested and have failed in the downturn. After discussing the bubbles we look at the collapse of the complex asset structure, and then put the crisis in the context of the literature. The paper concludes with a discussion of policy implications of the crisis, and advocates a significant improvement in the regulatory structure.

Keywords

Financial crisesasset bubblessecuritised assetsfinancial sector regulationE44G18
Type
Articles
Information
National Institute Economic Review , Volume 206 , October 2008 , pp. 5 - 14
Copyright
Copyright © 2008 National Institute of Economic and Social Research

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Adrian, T. and Shin, H.S. (2008), ‘Liquidity and financial contagion’, in Banque de France Financial Stability Review: Special Issue on Liquidity, No. 11, pp. 1–7.Google Scholar
Allen, F. and Gale, D. (1999), ‘Bubbles, crises and policy’, Oxford Review of Economic Policy, 15/3, pp. 9- 18.CrossRefGoogle Scholar
-(2000), Comparing Financial Systems, MIT PressGoogle Scholar
Barrell, R. and Choy, A. (2005), ‘The impact of China on the world and UK economies’, Treasury Committee, House of Commons HC 314i–ii.Google Scholar
Barrell, R. and Davis, E.P. (2005), ‘Policy design and macroeconomic stability in Europe, National Institute Economic Review, 191, pp. 94–105.CrossRefGoogle Scholar
Barrell, R., Kirby, S. and Riley, R. (2004), ‘The current position of UK house prices’, National Institute Economic Review, 189, pp. 57–60.CrossRefGoogle Scholar
Bernanke, B.S. (1983), ‘Non monetary effects of the financial crisis in the propagation of the Great Depression’, American Economic Review, 73, pp. 257–76.Google Scholar
Bernard, H. and Bisignano, J. (2000), ‘Information, liquidity and risk in the international interbank market: implicit guarantees and private credit market failure’, BIS Working Paper No. 86.Google Scholar
Bradley, C. and Shibut, L. (2006), ‘The liability structure of FDICinsured institutions: changes and implications’, FDIC Banking Review, 18(2), pp. 1–37.Google Scholar
Borio, C. (2005), ‘Monetary and financial stability, so close and yet so far’, National Institute Economic Review, 192, pp. 84–101.CrossRefGoogle Scholar
Borio, C., Furfine, C. and Lowe, P. (2001), ‘Procyclicality of the financial system and financial stability: issues and policy options’, BIS Papers no 1, pp. 1–57.Google Scholar
Brunnermeier, M. (2008), ‘Deciphering the 2007/8 liquidity and credit crunch’, Journal of Economic Perspectives (forthcoming).CrossRefGoogle Scholar
Cameron, G., Muellbauer, J. and Murphy, S. (2006), ‘Was there a British house price bubble? Evidence from a regional panel’, CEPR Discussion Papers 5619, Centre for Economic Policy Research.Google Scholar
Caprio, G., Klingebiel, D.Laeven, L. and Noguera, G. (2003), ‘An update of the Caprio-Klingebiel database, 1996, 1999’, Banking Crises Database, October.Google Scholar
Davis, E.P. (1994), ‘Market liquidity risk’, in Fair, D. and Raymond, R. (eds), The Competitiveness of Financial Institutions and Centres in Europe, Kluwer Academic Publishers.Google Scholar
-(1995), Debt, Financial Fragility and Systemic Risk, revised and expanded version, Oxford University Press.Google Scholar
-(1999), ‘Russia/LTCM and market liquidity risk’, The Financial Regulator, 4/2, Summer, pp. 23–8.Google Scholar
-(2003), ‘A typology of financial crises’, in Financial Stability Review, No 2, Austrian National Bank.Google Scholar
-(2008), ‘Liquidity, financial crises and the lender of last resort - how much of a departure is the subprime crisis?’, Paper presented at the Reserve Bank of Australia conference, ‘Lessons from the financial turmoil of 2007 and 2008’, 14-15 July.Google Scholar
Davis, E.P. and Karim, D. (2008), ‘Could early warning systems have helped to predict the sub-prime crisis?’, National Institute Economic Review, 206, October.CrossRefGoogle Scholar
Davis, E.P. and Salo, S. (1998), ‘Excess capacity in EU and US banking sectors - conceptual, measurement and policy issues’, LSE Financial Markets Group Special Paper No. 105.Google Scholar
Demirgüc-Kunt, A. and Detragiache, E. (2005), ‘Empirical analysis of the causes and consequences of banking crisis’, National Institute Economic Review, April.Google Scholar
Diamond, D. and Dybvig, P. (1983), ‘Bank runs, deposit insurance and liquidity’, Journal of Political Economy, 91, pp. 401–19.CrossRefGoogle Scholar
ECB (2008), ‘How has CDO market pricing changed during the turmoil?’, European Central Bank Financial Stability Review, June, pp. 154–62.Google Scholar
Fisher, I. (1933), ‘The debt deflation theory of great depressions’, Econometrica, 1, pp. 337–57.CrossRefGoogle Scholar
Friedman, M. and Schwartz, A.J. (1963), A Monetary history of the US 1867-1960, New York, NBER.Google Scholar
Goodhart, C.A.E. (2007), ‘Liquidity risk management’, Financial Markets Group special paper 175, London School of Economics.Google Scholar
-(2008a), ‘The regulatory response to the financial crisis’, LSE Financial Markets Group Special Paper no. 177.Google Scholar
-(2008b), ‘Liquidity and money market operations, a proposal’, LSE Financial Markets Group Special Paper No. 179.Google Scholar
Greenlaw, D., Hatzius, L., Kashap, A. and Shin, H.S. (2008), ‘Leveraged losses: lessons fromm the mortgage market meltdown’, US Monetary Policy Forum, February.Google Scholar
Guttentag, J.M. and Herring, R.J. (1984), ‘Credit rationing and financial disorder’, Journal of Finance, 39, pp. 1359–82.CrossRefGoogle Scholar
Herring, J. (1999), ‘Credit risk and financial instability’, Oxford Review of Economic Policy, 15/3, pp. 63–79.CrossRefGoogle Scholar
Herring, J. and Wachter, S. (1999), ‘Real estate booms and banking busts, an international comparison’, Working Paper 99-27, Wharton Financial Institutions Center, University of Pennsylvania.Google Scholar
Hoelscher, D.S. and Quintyn, M. (2003), ‘Managing systemic banking crises’, IMF Occasional Paper.Google Scholar
Honohan, P. (2008), ‘Risk management and the costs of the banking crisis’, National Institute Economic Review, 206, October.CrossRefGoogle Scholar
IMF (2008a), ‘Containing systemic risks and restoring financial sector soundness’, Global Financial Stability Report April 2008, Washington DC, International Monetary Fund.Google Scholar
-(2008b), ‘Financial stress and deleveraging’, Global Financial Stability Report April 2008, Washington DC, International Monetary Fund.Google Scholar
Kindleberger, C.P. (1978), Manias, Panics and Crashes, A History of Financial Crises, New York, Basic Books.CrossRefGoogle Scholar
Knight, F.H. (1921), ‘Risk, uncertainty and profit’, Boston, No. 16 in a series of rare texts in economics, republished by the LSE.Google Scholar
Minsky, H.P. (1977), ‘A theory of systemic fragility’, in Altman, E.I. and Sametz, A.W. (eds), Financial Crises, New York, Wiley.Google Scholar
Mishkin, F.S. (1991), ‘Asymmetric information and financial crises: a historical perspective’, in Hubbard, R.G. (ed.), Financial Markets and Financial Crises, Chicago, University of Chicago Press.Google Scholar
-(1997), ‘The causes and propagation of financial instability: lessons for policymakers’, in Maintaining Financial Stability in a Global Economy: A Symposium, U.S. Federal Reserve Bank of Kansas City, August.Google Scholar
Scheicher, M. (2008), ‘How has CDO market pricing changed during the turmoil? Evidence from CDS index tranches’, ECB Working Paper (forthcoming).Google Scholar
Shafer, J.R. (1986), ‘Managing crises in the emerging financial landscape, OECD Economic Studies, 8, pp. 56–77.Google Scholar
UK Parliament (2008), ‘The run on the rock’, House of Commons Select Committee Report.Google Scholar
Wadhwani, S. (2008), ‘should monetary policy respond to asset price bubbles? Revisiting the debate’, National Institute Economic Review, 206, October.CrossRefGoogle Scholar