What Caused The Global Financial Crisis according to Jerry Davis

The Global Financial Crisis according to Jerry Davis

Jerry Davis is the Wilbur K. Pierpont Professor of Management at the Ross School of Business at the University of Michigan. He is the author of Managed by the Markets: How Finance Reshaped America.

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

Majority Conclusions

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?

It was (mostly) Wall Street's fault, although a combination of factors enabled and encouraged it (see book excerpt).

3. I believe the crisis is ongoing and I project the Global Financial Crisis will end in the year
2013 or beyond.

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

5. What still should change as a result of the crisis?
Dodd-Frank was a hodge-podge of reforms without a coherent underlying theory, but many of its components would be helpful, if they managed to be filled out without undue influence from the finance sector. But as long as 15-25% of mortgages are underwater, it is hard to foresee an end to the economic malaise in the US, as homeowners are unable to move to pursue employment and other opportunities elsewhere and consumption is depressed by a negative wealth effect.

Compiled by Gary Karz, CFA
Host of InvestorHome

Global Financial Crisis Survey

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