What were the primary causes of Global Financial Crisis?

1. Nye Lavalle

   Greed, ignorance, arrogance, and international bankers.

2. Vox Day

   Credit boom and malinvestment in the financial sector.

3. Assaf Razin

   Banking/shadow banking prudential regulations were inadequate.

4. Jacob Madsen

   Asset bubbles driven by excessive credit and low cost of capital that in turn was driven down by low price of risk.

5. Phillip Anderson

   The capitalization of the economic rent into a tradable privilege, permitted to then have credit created upon this capitalized value.

6. Ross Levine

   Financial regulators and government officials too often work for the best interests of the executives of the financial services industry and not in the best interests of the public at large.

7. Peter Tanous

   The single biggest cause of the crisis was the decline in home prices and the belief that home prices never decline (because in the history of the United States it had never happened before).

8. Fred Foldvary

   The primary cause was massive subsidies to real estate, including cheap credit, favorable tax treatment, mortgage guarantees, Fannie Mae and Freddie Mac, and public works that increase land values.

9. Jennifer Taub

   The financial crisis was the result of the burst of a debt-fueled asset bubble which was enabled by government deregulation and low interest rates and corporate governance failures. Wall Street, K-Street and the C-Suite are to blame.

10. Fred Harrison

    All sections of society conspire to reinforce a financial system that fosters public and private indebtedness. Credit is a collateral consequence of an irresponsible public revenue system than penalizes work and saving and rewards investments in land-based assets.

11. John Train

    My first book, Dance of the Money Bees, describes our swarming instinct, which is like the bees' swarming instinct: irresistibly powerful. Like gambling, like love. So who's responsible? Human nature. The other factors, the government, Wall Street, are just enablers.

12. Robert Litan

    Too much subprime lending, aggravated by excessive leverage in commercial and investment banks. Both market forces and regulatory failures contributed to both problems. And too much pressure by Congress and Presidents of both parties over the years on the GSEs to buy/guarantee securities backed by less-than-prime mortgages.

13. Kevin Dowd

    Two idealogical causes: interventionist economics (esp. managed economy stuff, Keynesianism) and modern finance. I regard both as essentially alchemical, i.e., more or less consistent bodies of thought, but based on misconceived assumptions. The latter gave idealogical cover to the deterioration of modern capitalism into what is now clearly cronyism.

14. John Wasik

    Greed, deregulation, securitization, loose regulation of mortgage brokers/real estate agents, no regulation of ratings agencies, compensation tied to packaging mortgages, false belief in real estate as an investment, false belief in real estate as a secure asset, corruption by banks, Freddie/Fannie with Lobbyists, removal of Glass-Steagall protections.

15. Richard Roll

    The reduction in the value of human capital that was precipitated by a decrease in the anticipated worldwide growth rate in wages, which was itself induced by a growing expectation that the public sector was growing globally relative to the private sector. This happened in early 2007, I think. The reduction in human capital value caused a decline in real estate values globally.

16. Michael Lim Mah-Hui

    Primary causes of crisis must be understood at three levels : (i) faulty theory and methodology of rational expectation and market efficiency schools; (ii) financial deregulation and financial malpractices; (iii) three macro-economic structural imbalances and their interaction - current account imbalance; imbalance between financial sector and real economy; wealth and income imbalance.

17. Nicholas Ryder

    One of the most significant changes that needs to take place is the prosecution of those involved in white collar criminals activities that caused the financial crisis. There has only been one successful prosecution in the US and one in the UK since 2008. Financial regulatory bodies have been preoccupied with imposing media friendly financial sanctions as opposed to starting criminal proceedings.

18. Christopher Thornberg

    The crisis resulted from a combination of factors. Ultimately the biggest were a) the complete collapse of credit standards in the lending industry, which b) was hidden in the context of financial innovation, with the help of the credit reporting agencies (who said the products were golden), c) overleveraging of (mainly) the investment banks, and d) regulators were completely out to lunch (not doing their jobs).

19. Paul Sperry

    Readers Digest version: Washington through various regulatory and enforcement mechanisms socialized the mortgage industry and gutted traditional mortgage underwriting standards to help more lower-income minorities buy homes; and then, when those riskier loans failed, the politicians and regulators blamed Wall Street and the private sector, which merely responded to the perverse incentives mandated by government.

20. Larry Doyle

    The primary causes of the financial crisis were the direct and indirect effects of a conspiracy -- in part a de facto conspiracy and often a resulting conspiracy -- that stemmed from the massive flow of funds that went from Wall Street to Washington to neutralize an incompetent and complicit regulatory system, so that Wall Street could answer to nobody but itself. All three legs (Wall Street, Washington, regulators) were critical to the conspiracy playing out that brought about the crisis.

21. James Kwak

    The Global Financial Crisis was caused by the combination of an unstable financial system and a credit bubble, which resulted from long-term shifts in the financial sector toward greater innovation and risk-taking. Traditional prudential regulation was unable to cope with the risks presented by this new system, in part because financial institutions innovated around existing regulatory structures and in part because the industry used its political power to dismantle existing regulations and block new ones.

22. Jerry Davis

    The primary causes of the financial crisis were too complicated to summarize in a sentence, but included financial deregulation and a race to the bottom among regulatory agencies, the transformation of banking via securitization, the compensation system of Wall Street banks, the mis-aligned incentives of the rating agencies, wealth effect-driven consumption arising out of home price increases, entrepreneurial opportunities created for mortgage brokers and house-flippers, and a handful of ancillary factors.

23. Aaron Clarey

    A laziness and sloth brought about by the wealth-producing forces of capitalism in the post WWII era. This wealth made people soft and over 2-3 generations made these people forget there was no such thing as a free lunch. Instead of production, these veritable adult-children wanted to believe in perpetually increasing asset prices as the main form of wealth creation. The discrepancy between actual production and asset prices merely financed by mortgaging the future and burgeoning deficits at the state, federal and local levels.

24. Yalman Onaran

    Too many people borrowed too much that they couldn't pay back. Too many banks facilitated this lending while being part of the borrowing binge themselves. Because the banks, consumers and companies had too much leverage and very thin capital to protect themselves, a drop in prices could bring the whole house of cards down. Then governments took on some of the debt to "fix" the problem, but this has only shifted the problem from private balance sheets to public ones. So it's the turn of countries to blow up.

25. Johan Lybeck

    The bubble in housing markets in some Anglo-Saxon countries (US, UK, Australia) as well as well as Spain and Denmark, in combination with greedy bankers and investment bankers, overworked and incompetent supervisors, faulty econometric models of measuring risk in complex instruments in banks as well as rating institutes, naïve and greedy investors such as the German Landesbanken and many others (what business and competence had the Agricultural Bank of China selling CDS protection on the Icelandic Kaupthing Bank?).

26. Robert Rodriguez

    The proximate cause was the Federal Reserve's unwise and unsound policy, along with regulatory roles which allowed credit to blossom. Wall Street ran with it and the private side took that flexibility in excess and supercharged it (yet the fed did not recognize it). Before the crisis, Bernanke believed there would be no contagion and subprime was a small area. In a 2007 speech, Absence of Fear, I argued that subprime credit was the canary in the credit coal mine and we had a major problem. Soon thereafter the Fed was taking extraordinary actions.

27. Dean Baker

    The problem really is not a financial crisis. The problem was an economy driven by housing bubbles. When the bubbles burst there was nothing to replace the demand. In the case of the U.S. the demand lost by the plunge in construction and the loss of bubble-driven consumption was equal to about 8 percentage points of GDP. We have no tools that allow us to easily replace 8 percent of lost GDP, regardless of how well the financial system is working. We would be in pretty much the same place today if the bubble had deflated and there had been no financial crisis.

28. Matthew Lynn

    It was, and still is, primarily a debt crisis. Debt levels have been rising steadily right across the developed world for the last three decades, and by 2008 had reached a point where they were unsustainable. There were two reasons for that build up of debt. One was the severing of the final link between the monetary system and gold in 1971, and the creation of a system of pure fiat money. The second was an intellectual climate created by neo-Keynesian economists who believed debt didn’t matter. That spread to regulators and politicians – and the result was the mess we have now.

29. Steve Keen

    A private debt bubble that began in the mid-1960s, should have terminated in the 1980s, but was allowed to move from one asset class to another by Federal Reserve rescues through a number of crises, until the debt level reached an unprecedented 300% of GDP. A slowdown in the rate of growth of this debt bubble in 2007 caused the turn from boom to bust, and deleveraging by the private sector is now the primary cause of the decline. Given that private debt is still about 170% of GDP too high--compared to the level of debt needed to fund productive rather than speculative activity--this crisis will continue for many years if bankruptcy and debt repayment are the only means used to reduce private debt.

30. Richard Vague

    Our research shows that a rapid increase in private debt (business plus consumer debt, including mortgages), coupled with high overall levels of private debt, is *the* reason for financial crises in major economies. Specifically, if the private debt to GDP ratio in an economy grows by roughly 17% or more in a five year period (which I call "runaway lending"), and the overall level of private debt to GDP is 150%, then you are almost certain to have a financial crisis. And if not a crisis, a dramatic deceleration in GDP growth. None of the other factors that are often cited as causes of financial crises come much into play in a causal or predictive way—not government debt, not current account trends, nor currency issues, etc.

31. Les Leopold

    The crisis was caused by a combination of financial deregulation and too much money in the hands of the few (due to dramatic changes in the tax code). An unfettered Wall Street created a wide variety of new financial instruments to suck up this excess capital. Much of it turned out to be enormously risky and ultimately turned into toxic assets. A key element was the ability to build a massive set of new securities upon sub-prime loans which in turn pumped up a housing bubble. When housing prices leveled off, the assets based upon them collapsed. The financial markets froze and a crash ensued. The same two conditions -- financial deregulation and excessive money in the hands of the few -- also were key factors in the 1929 crash.

32. Jay W. Richards

    The primary causes of the financial crisis, as opposed to contributing factors, mere necessary conditions, and amplifiers (such as certain mortgage-backed securities fed into global securities markets), was the convergence of incentives created by a variety of federal affordable housing goals, with Fed policy and an implicit "Too Big to Fail" assumption in some large institutions playing key supporting roles. These created massive demand for risky loans, scrambled normal market signals, and the various actors with the relevant markets responded, mostly rationally, to those incentives. The capricious bailout policies of the US Treasury in 2008 vastly contributed to the market panic of September 2008. In explaining the actions of some investment banks and rating agencies, an additional assumption played a key role: namely, that the housing market in the U.S. would not drop nationwide at the same time.

33. Christine Richard

    The financial crisis was caused by the US economy becoming too reliant on credit and debt. For more than two decades we have ceded our manufacturing base to foreign countries - most notably China. This process involved a very seductive trade off. Our manufacturing/engineering/blue collar worker economy was exchanged for an unlimited demand to buy US dollar denominated securities by the rest of the world. Dollars piled up overseas as we bought more and more products from other countries and those dollars were handed back to people on Wall Street to invest in whatever they could create. Since there was no longer demand to finance factories, Wall Street created securities that financed consumption. The most efficient way to do that was through the housing market. There was no discipline in terms of what was created (toxic super senior CDOs) because there was demand to buy ANYTHING.

34. Jeremy Hammond

    The primary cause was the Federal Reserve's policy of lowering interest rates below where they otherwise would be if determined by a free market through monetary inflation. With the dollar as the world's reserve currency, other central banks followed suit. Also contributing to the housing bubble that precipitated the crisis was the U.S. government's policy of encouraging homeownership and the role of the government-sponsored enterprises in buying up mortgages and inventing their securitization. The government-legislated oligopoly of the credit ratings agencies rubber stamped them with AAA ratings, and the Fed, in addition to purchasing government debt, also bought mortgage-backed securities, thus sending the message to foreign banks that they were as good as U.S. Treasuries. Furthermore, the implicit promise of taxpayer bailouts for the large financial institutions incentivized riskier behavior.

35. Michael Hirsh

    Deregulation and fecklessness on the part of Washington as free-market fervor, which became a kind of national religion in the aftermath of the Cold War, established the canard of self-regulating markets as the ruling zeitgeist. Policy-makers came to ignore key differences between financial and other markets, which economists had known about for 300 years. Financial markets were always more imperfect than markets for goods and other services, more prone to manias and panics and more susceptible to the pitfalls of imperfect information unequally shared by market players. After the Great Depression authorities had understood that the financial markets must be more regulated than other markets, not least because they supplied the lifeblood of a capitalist economy: capital. Yet that critical distinction was lost in the whirlwind of fervor that championed free markets and market solutions, especially in the minds of overconfident U.S. policymakers, after the Cold War.

36. John Rubino

    We created a system based on central bank money creation and fractional reserve banking that was eventually guaranteed to build up unsustainable debts and then collapse. The process began in 1913 with the creation of the Fed, accelerated in 1971 with the abandonment of the gold standard, and finally crashed in 2000 with the bursting of the tech bubble. Since then the US has been actively trying to destroy the value of the dollar to decrease the cost of its debts. Viewed this way, the housing bubble was a logical outgrowth of the government's ongoing attempt to pump up asset values via money creation and a weaker dollar. It was just the latest in a series of mini bubbles within the larger dollar bubble. When the dollar bubble bursts it will sweep away most of the systems Americans now take for granted -- the global military empire, cradle-to-grave welfare, good public services. Savings will be vaporized and a whole generation impoverished. Very ugly decade coming.

37. Viral Acharya

    The primary cause of the global financial crisis is that the externalities arising from a financial sector collapse and boom-bust cycles of aggregate markets such as residential housing were not adequately kept in check, in that, profits were privatized and losses were eventually socialized, resulting in great misallocation of resources, in a leveraged manner, to chasing a limited asset-class. Government-sponsored enterprises or state-owned banks were part of this excess - often explicitly required by governments to do so, but private sector financial firms also engaged in significant leverage and risk-taking. Declining growth in Western economies and availability of global surpluses to fund their fiscal deficits also contributed to the excess. But in one line, externalities or spillover effects from financial sector and housing sector meltdown were ignored through weakening of regulations, and in some cases their build-up was even explicitly encouraged for populist goals.

38. Matthew Watson

    The balance of power established through the initial Bretton Woods agreements was first gradually eroded and then finally washed away as governments gave in to one demand of finance after another. What emerged was the fabled light-touch regulatory structure that was backed by seemingly endless sources of leverage plus the faith of economic science that market-based arbitrage is always auto-correcting. This set a context in which banks were able to innovate in any number of complex derivatives instruments, where the ones that relied on parameter estimations of mortgage default correlation have merely been the most talked about in the wake of the onset of the crisis. Such instruments were inadequately stress-tested, at least in part because the computational power does not yet exist to understand the way that their prices might change in real time. Too much money consequently chased too brittle instruments, and the trained intuition of economists that supply always matches demand under the influence of competitive conditions merely delayed the day of reckoning.

39. Donald Rapp

    Starting with the great stock bull market of 1982 to 1999, proceeding through the dot.com balloon, and thence to the housing bubble of 2002-2007, and finally the stock bull market of 2009-2011, we have become too reliant on paper assets (rather than earnings from work) as a source of wealth. We keep bidding up paper assets (mainly real estate and stocks) to outrageous levels thinking that this is a real source of wealth – until they collapse of their own weight. This sawtooth pattern of overbuying and overselling leads to excessive spending during boom times and reluctance to pull back during slack times, further exacerbating the debt problem. The growth of stock prices has hugely outpaced the growth of productivity and production. Governments aid and abet bubble formation through fiscal policies and lack of regulation, because they want to get reelected and people are happier while bubbles are expanding (additional response here).

40. Nolan McCarty

    Five factors turned the housing bubble that hit the U.S. and other countries into a full-fledged crisis. The first was deregulation that permitted innovative new financial instruments, such as exotic mortgage products, CDO tranches, and credit default swaps to emerge without meaningful regulation. The second was deregulation that permitted financial firms to engage in a riskier range of activities. The third was a reduction in the monitoring capacity of regulators, either through deliberate neglect or in the failure of staffing and budgets to expand at the same rate as the markets they were supposed to regulate. The fourth was the shifts in competition policy that allowed the creation of financial institutions that were too big (and too politically powerful) to fail. The fifth component was the privatization of government financing of mortgages through Fannie and Freddie, which created two additional too-big-to-fail institutions.

41. Francis Longstaff

    The Federal Government has pursued a number of poor policies over the past several decades that have created many distortions and perverse incentives in the economy. Corporate tax policy gave firms incentives to leverage. Housing policy gave financial institutions incentives to lower underwriting standards and provide credit when they should not have done so. The current political leadership focuses on wealth transfers rather than wealth creation. The current crisis cannot be due solely to the effects of 2 trillion dollars of subprime losses. This would only cause a transfer of wealth. The current crisis is primarily due to the cumulative effects of toxic government policy which has destroyed 20 trillion in household wealth via the real estate and equity markets. When the government fails in its leadership role and provides bad incentives, one should not be surprised if everyone follows these bad incentives. The leader gets the lion's share of the blame (government), not the followers (Wall Street).

42. Aaron Brown

    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.

43. Roddy Boyd

    Ultimately it had its terminal root in U.S. regulatory failure and the diminishment of corporate risk-management capabilities. In the U.S. domestically, the eradication of the Glass-Steagall Act in 1998 completely skewed the financial playing field to the commercial banks. Institutions that had no corporate history of managing dynamic (daily) capital markets risk were allowed to fund inventories of securities and loans at LIBOR or cheaper. With the standard quarterly earnings pressures, it became necessary to have massive exposure to “carry,” or higher-yielding bond assets that were funded cheaply. The initial easy profits of 02-05’s low rate-regime begat the drive to own conduits, structure securitized products in ever more esoteric fashions and above all, to own land. The only way the investment banks could compete was through leverage so Bear and Lehman ran their firms at between 30- and 40-times their equity capital base. So mid-2007 happens, Bear’s hedge fund collapses and UBS, to pick a name, began to liquidate nearly $100 billion in various mortgage loans and securities. Much hilarity did not ensue.

44. Jesse Colombo

    The Global Financial Crisis was caused by the partial popping of a truly global credit and asset bubble that inflated in large part due to the ending of the Bretton Woods Agreement in 1971, which allowed unlimited expansion of the money supply (including credit money) in the coming decades. The credit and asset bubble began to inflate (see chart) in earnest in 1982 when U.S. interest rates peaked, and their steady decline over the past three decades helped to inflate longer term, still-unpopped bubbles in U.S. equities and property prices. The economic boom of the 1980s, 1990s and early-2000s was the result of the growing credit and asset bubble, which created false prosperity throughout the world. The bubbles began to pop as the Federal Reserve raised interest rates from 2004 to 2007, which caused the crisis. Unfortunately, the bubbles are nowhere near fully deflated, and have actually grown larger by some measures because the Federal Reserve pursued extremely stimulative monetary policies after the crisis to reinflate the bubbles, which has led to what we know as the economic recovery, which I consider to be a "Bubblecovery" or a bubble-driven economic recovery.

45. Robert Hardaway

    In each chapter of my book I focused on government policies as the primary cause of the housing bubble: the CRA (which not only affected those financial institutions directly regulated by CRA, but set the example for other institutions not directly regulated by it); Clinton regulations promulgated in the 1990's threatening to punish banks which did not lend to subprime borrowers; securitization of mortgages by Fannie Fae and Freddie Mac, setting the example for private financial institutions to follow suit by devising increasingly complex and risky investment vehicles; mortgage subsidies to the richest one third of Americans via the mortgage tax deduction; local exclusionary rules and zoning regulations which cause housing prices to skyrocket, particularly in California; federal reserve interest rate policies designed to perpetuate the housing bubble; the decision to delete housing prices from the CPI in an effort to camouflage the effects or rising housing prices on the CPI. While other causes were discussed (banking, realtor, appraisal, and accounting policies), they were discussed in the context of reaction to byzantine government regulations.

46. Larry Allen

    The economy emerged from the recession of 2001 with a weak-winged, bubble driven expansion. The Federal Reserve faced the thorny task of defusing bubble-building forces without erasing the gains the economic recovery had captured from the bubbles. Investors began embracing riskier investments in a bid to maintain rates of return in the face of a long trend of declining interest rates. In cautious monetary tightening the yield curve flattened out, tending to equalize short-term and long-term interest rates. Since banks make profits by borrowing short-term at low rates and lending long-term at higher rates, the flatter yield curve weakened the banking system. Banks tried to save themselves by undertaking riskier investments, and using advanced technology to better evaluate risks. Traditional mortgage applications appeared less important in a world where the computer and internet afforded newer methods of collecting and evaluating vital information about each applicant. It was hoped that newer technology provided better information and better information made free markets work even better. It was a well-sounding, well-intended strategy that did not meet all the needs of the situation.

47. Nomi Prins

    The primary causes of Global Financial Crisis are a combination of

    1. Wall Street's skill at constructing extremely leveraged securities collateralized by fraudulent or shaky loans and obtaining high ratings on them through the use of credit derivatives or other techniques, thereby rendering them attractive to investors globally and thus stoking demand for such securities and loans which in turn pressed lenders and underwriters to fuel the fire,
    2. The Big Banks' aggressive practices of leveraging capital (including the 2004 SEC agreement that the mega banks could manage and report their own capital ratios, rather than be subject to externally imposed verifications),
    3. The highly profitable diffusion of risk under false pretenses of underlying security stability, as well as inappropriate constraints on the make-up, imbedded leverage and inter-dependence of complex financial products,
    4. Weak regulations and misinformed or uninformed regulators regarding the above,
    5. A complacent sound-bite minded Congress with respect to proactively, or even reactively paying attention to what was going on or considering reform measures to avert disaster, and
    6. An enabling executive Branch, including the Treasury Department and the Federal Reserve (whose leaders are selected by the President and confirmed (always) by Congress.) Please see Chapter Two of It Takes a Pillage for more detailed explanation of this politilcal-financial risk pyramid.

48. Isaac Gradman

    The roots of the mortgage crisis took hold after the collapse of high-tech stocks in 2000, when the stock market crashed that year. The Fed cut interest rates (which caused a corresponding decrease in mortgage rates) and held rates at rock-bottom levels for an extended period even after the recovery. Home prices appreciated and the economy grew as new home buyers, speculators, and refinancing activity rose, while the cost of financing a home was dropping. Low interest rates and the resulting wave of mortgage prepayments in the early 2000s (generating huge profits for investors in subordinate mortgage backed securities) generated an insatiable appetite by institutional investors for additional mortgage credit risk. Wall Street responded by expanding its capacity to meet the oversized demand for housing, both by encouraging existing borrowers to refinance and by making loans to borrowers who previously could not qualify. After a few years, common sense began to take hold and eventually, rationality returned. When this unprecedented run of home price appreciation came to end and home prices finally leveled off, borrowers could not make their mortgage payments, refinance, or recoup the unpaid principal balances of their loans by selling. Those who had enough equity in their homes to try to sell rushed to do so, causing a flood of houses on the market. Soon, the supply of houses for sale exceeded the number of potential buyers. Once it was clear that millions of mortgages would not be paid off, panic gripped the financial markets, and the mortgage crisis of 2007 was in full swing.

49. Clive Boddy

    Greed, unrestrained by conscience, and fueled by a totally ruthless, selfish and ambitious love of money, power and prestige, was the main cause of the crisis. This was enabled by the global trade in and use of financial derivatives which served no real economic or social purpose and which were seemingly designed for the sole purpose of inter-bank trade to generate paper revenue and therefore paper profits and therefore monetary bonuses. The financial products, such as Collateralized Debt Obligations of Asset Backed Securities ("CDOs of ABS"), were reportedly so complex that most traders did not understand them. This begs the question - what sort of person trades in multi-million dollar products that she or he does not understand? The answer must be at best a person who was just in it for the money and at worst a person totally without conscience, such as psychopaths are. These people without a conscience are about 1% of the total population and have come to be called Corporate Psychopaths to differentiate them from their criminal peers. The realization that because of the numbers of people involved, Corporate Psychopaths must have been working in the financial services sector and the corporate banks in which the crisis was fostered was one of the considerations that led to the development of the Corporate Psychopaths Theory of the Global Financial Crisis. This is the theory that Corporate Psychopaths, through their example, leadership and influence on their peers in the financial services sectors, led, encouraged, facilitated, enabled and therefore, ultimately caused the crisis.

50. Edward Pinto

    The major cause of the financial crisis in the U.S. was the collapse of housing and mortgage markets resulting from an accumulation of an unprecedented number of weak and risky Non-Traditional Mortgages (NTMs). These NTMs began to default en mass beginning in 2006, triggering the collapse of the worldwide market for mortgage backed securities (MBS) and in turn triggering the instability and insolvency of financial institutions that we call the financial crisis. Government policies forced a systematic industry-wide loosening of underwriting standards in an effort to promote affordable housing. This paper documents how policies over a period of decades were responsible for causing a material increase in homeowner leverage through the use of low or no down payments, increased debt ratios, no loan amortization, low credit scores and other weakened underwriting standards associated with NTMs. These policies were legislated by Congress, promoted by HUD and other regulators responsible for their enforcement, and broadly adopted by Fannie Mae and Freddie Mac (the GSEs) and the much of the rest mortgage finance industry by the early 2000s. Federal policies also promoted the growth of over-leveraged loan funding institutions, led by the GSEs, along with highly leveraged private mortgage backed securities and structured finance transactions. HUD’s policy of continually and disproportionately increasing the GSEs’ goals for low- and very-low income borrowers led to further loosening of lending standards causing most industry participants to reach further down the demand curve and originate even more NTMs. As prices rose at a faster pace, an affordability gap developed, leading to further increases in leverage and home prices. Once the price boom slowed, loan defaults on NTMs quickly increased leading to a freeze-up of the private MBS market. A broad collapse of home prices followed.

51. Hersh Shefrin

    Psychological pitfalls generated the global financial crisis, which evolved in accordance with Minsky's script. Underlying Minsky's script is the psychological framework at the heart of behavioral finance. Minsky told us that economists have historically ignored the part of Keynes's theory that relates to the relationship between Wall Street and the overall economy. In this respect, McClean and Nocera's book All the Devils are Here point out that during 2003-2007, it was Wall Street that provided the financing for much of subprime mortgage origination, which it then securitized. Lying at the center of Minsky's analysis of what drives a financial crisis is financial innovation involving excessive Ponzi finance, meaning short-term lending by financial institutions against long-term cash flows that rely too heavily on price appreciation. In this respect, much of the mortgage lending associated with the housing bubble relied on house prices continuing to rise at rates that exceeded historical averages. Minksy argued that the financial sector is politically more agile and powerful than the regulators who oversee them, which is why the financial sector will ultimately win the regulatory game. In this respect, the passage of the Gramm–Leach–Bliley Act, also known as the Financial Services Modernization Act of 1999, and the political pummeling of CFTC chair Brooksley Born for having proposed increased scrutiny of derivatives trading are examples of end results favored by the financial sector. Minsky was also concerned that the Fed was overly focused on monetary policy at the expense of overseeing the quality of lending in financial markets. In this respect, during 2011 Fed chair Ben Bernanke made the same point, in describing lessons to be learned from the financial crisis. Underlying the complex Minsky dynamic are a series of critical psychological phenomena such as excessive optimism, overconfidence, confirmation bias, and aversion to a sure loss. These are manifest in asset bubbles, weak regulation, excessive leverage, excessive risk taking, and the shattered belief expressed by Alan Greenspan that self-interest can be relied upon to produce rational decisions.

52. Ann Pettifor (more than one paragraph - see link)

53. Laurence Siegel (more than one paragraph - see link)

Compiled by Gary Karz, CFA
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