The Global Financial Crisis according to Francis Longstaff

Global Financial Crisis Survey

Francis Longstaff is the Allstate Professor of Insurance and Finance at UCLA Anderson. Professor Longstaff is a CPA and CFA and from 1995 to 1998 he was head of Fixed Income Derivative Research at Salomon Brothers Inc. in New York. Professor Longstaff has also worked in the research department of the Chicago Board of Trade and for Deloitte and Touche as a management consultant. Some of his publicly available crisis related research includes Systemic Credit Risk: What Is the Market Telling Us? (with Vineer Bhansali and Robert Gingrich) in the July/August 2008 issue of the Financial Analysts Journal and The Subprime Credit Crisis and Contagion in Financial Markets in the Journal of Financial Economics (2010).

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

I agree most closely with the Wallison Dissent

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?

The government is primarily to blame.

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

2013 or beyond

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

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 soley 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).

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

Eliminate toxic government policies and incentives.

Compiled by Gary Karz, CFA
Host of InvestorHome

Global Financial Crisis Survey

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