Financial Crisis

Only available on StudyMode
  • Download(s) : 110
  • Published : December 14, 2013
Open Document
Text Preview
The Over-Weighted Factors
The Subprime Crisis was cause by multiple factors, some more impactful than others. In the aftermath, there was enough blame to be spread all around, but some institutions and firms did not deserve the level of blame they received. The amount of blame placed on the Gaussian copula function is unjustified. Some states took heat with regard to laws passed to protect home buyers in times of default. The Federal Reserve was quickly pointed out for not recognizing a housing bubble and keeping interest rates too low. Some theories presented by Caballero on why the financial crisis occurred consist of irregularities that he failed to explain.

Caballero writes that causes of the financial crisis are linked to a global imbalance or shortage of safe debt instruments, and that this shortage of safe debt instruments presented the private sector to produce these securities (8). Caballero cannot say a shortage of safe assets caused the financial crisis, since it was the private sector that was the culprit behind the crisis with the instruments they engineered. A shortage of safe debt instruments did create opportunity for the private sector, but this shortage is not what drove the private sector to take on significant risks. The private sector could have actually helped bridge the gap of shortages by actually producing safe instruments by only issuing prime mortgages and practicing good risk management, but they were driven by other forces such as greed to capture market shares of investors. To imply that a shortage of safe assets drove banks to create high risk securities is absurd. Using economics theory, since the demand for safe debt instruments was far greater than the supply, therefore, the excess demand should drive the interest rates on these securities close to zero. This was not the case, as interest rates stayed fairly stable up until the crisis hit. If the demand for safe debt instruments was as strong as Caballero...
tracking img