The Global Financial Crisis according to Aaron Brown

Global Financial Crisis Survey

Aaron Brown is with AQR Capital Management and is the author of the recently released book Red-Blooded Risk: The Secret History of Wall Street. His other books include The Poker Face of Wall Street and A World of Chance: Betting on Religion, Games, Wall Street (coathored).

1. Which FCIC View best represents the causes of the Financial Crisis?

Dissenting Views By Hennessey, Holtz-Eakin & Thomas. I don't mean I agree in detail with all of their findings, but this was the only account that approached the question rigorously. The point is to identify the crucial causes that were present everywhere there was a crisis and never present without a crisis. The three member dissent is a reasonable attempt to do that. One important consequence is they represent the crisis as an evolving sequence of events, not either a permanent feature of the economy or a single, sudden event.

2. Which narrative presented by Douglas Elliott and Martin Baily of the Brookings Institute in Telling the Narrative of the Financial Crisis: Not Just a Housing Bubble best represents the causes of the Financial Crisis?

Everyone; was at fault: Wall Street, the government, and our wider society. The crisis was the result of complicated interactions among government, the financial industry and everyone else. If any significant group had acted differently, the crisis would have evolved differently. But no one group could have acted in a way to avoid any crisis, nor did any one group act in a way that would have forced a crisis without cooperation from other groups. Therefore we have to say everyone was to blame.

3. I believe the crisis is ongoing and I project the Global Financial Crisis will end in the year

2013 or beyond. I gave a talk at the Fields institute in early 2007 in which I predicted a decade of chaos and financial distress. I have not changed my views, I do not expect to see a clear path to a prosperous future until 2017.

4. What were the primary causes of the Global Financial Crisis?

What we call the "global financial crisis" is better viewed as a transition away from a credit-money economy to a derivatives-based one. In the longest run, the cause is an improvement in financial technology, credit money would have been replaced eventually. In the shorter run, we can blame the crisis on the destruction of credit money by government actions starting with the monopolization of money issuance in the mid-1800s to throwing off the last vestiges of credit discipline in 1971. That ushered in a period of constant monetary crisis. In the shortest run, the primary cause was the creation of $5 trillion of balance of payment surpluses by China, Japan and oil exporters. The governments were unwilling to let their citizens control these surpluses, either to spend or to invest, and wanted to put them in foreign-denominated, short-term, low-risk securities. There weren't enough of those to go around, so financial engineers pretended to transmute local-denominated, long-term, risky securities. After that, the crash was inevitable.

5. What still should change as a result of the crisis?

We do. The arc of financial evolution is beyond our control, our job is to survive the ride, and that will require all kinds of change. We are living in the best of times, for all the dramatic uncertainties, and they will only get better. But we will not be able to enjoy them unless we go with the flow. The best preparation is to listen to a lot of Bob Dylan and ignore financial reports.

Compiled by Gary Karz, CFA
Host of InvestorHome

Global Financial Crisis Survey

Home Page      Table of Contents      Search

Please send suggestions and comments to Investor Home

Last update 11/18/2011. Copyright 2011 Investor Home. All rights reserved. Disclaimer