The Great Recession
Participation Questions:
In your opinion, what is the most critical event that caused the collapse of the U.S. financial system?
In my opinion, deregulation is primarily the critical event that led to the financial crisis of 2008. This is because as a result of the deregulation, banks were allowed to engage in hedge fund trading with derivatives. In return, banks charged more for mortgages in order to back up the sales of the derivatives. This resulted to a subprime mortgage crisis.
What other factors contributed to the Great Recession? How?
There are other factors that also caused the Great Recession. Other factors that contributed to the issue was greed, securitization of loans, and fraud among other factors (Copelovitch, 2017). Banks retained loans that they had originates, somethings that gave lenders the incentive to underwrite loans. In regard to greed, key financial players such as mortgage originators wanted to get rich hence they went to great lengths to maximize loan volumes.
What is the difference between the two concepts, moral hazard and systemic risk? On which concept do you think policy makers should focus?
Moral hazard is a situation whereby key economic actors profit maximize through inefficient decision making since they are able to evade costs associated with their code of conduct (Erturk, 2019). Systemic risks on the other hand refers to events that are likely to occur and whose occurrence would result to adverse effects on a system or the economy (Laeven et al., 2016). I believe policy makers should mainly focus on moral hazard. This is because the great recession was mainly caused by moral hazards.
In your opinion, was it possible to avoid the Great Recession? How?
I believe that the great recession would have been avoided. If policy makers been strict more so in regard to moral hazards, I believe that the phenomenon would have been avoided. In addition, had the different factors that contributed to the economic meltdown addressed way before they got out of hand, I believe that this would have been avoided. Since the recession was caused by a range of different factors, I believe that it would have been difficult to avoid the recession however ultimately with the right measures they would all have been addressed effectively.
References
Copelovitch, M. (2017). This Time Should Have Been Different: The Causes and Consequences of Macroeconomic Policy Failure in the Great Recession. Prepared for “Understanding Challenges to the Contemporary Global Order,” Filzbach, Switzerland.
Erturk, K. A. (2019). Intrinsic Moral Hazard (No. 2019_03). University of Utah, Department of Economics.
Laeven, L., Ratnovski, L., & Tong, H. (2016). Bank size, capital, and systemic risk: Some international evidence. Journal of Banking & Finance, 69, S25-S34.