The Deeper Causes of the Financial Crisis





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Published on Apr 18, 2013

Mark Adelson

Losses on U.S. residential mortgage loans are too small to
explain the magnitude of the 2008 financial crisis. Total
losses, including both losses realized to date and those yet
to be realized, should fall in the range of $750 billion to $2
trillion. The global magnitude of the crisis is significantly
larger, probably in the range of $5 trillion to $15 trillion,
depending on the measuring approach. This implies that
losses on residential mortgage loans cannot be the main
cause of the crisis. They can only be a trigger that unleashed
the true causes. The failure (or near failure) of a significant
number of major financial firms suggests that high leverage
and strong risk appetites were important immediate causes
of the crisis. However, explaining the sources of high leverage
and strong risk appetites requires probing for deeper
causes that developed over a longer period. This article proposes
deeper causes that include securities firms' conversion
from partnerships to corporations, the 30-year deregulation
trend, the quant movement, the spread of risk-taking culture
throughout the financial industry, and globalization.


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