Global Financial Crisis Survey
Jakob Madsen is a Professor of Economics at Monash University. Previously he worked in the financial sector and while serving as a Professor at the University of Copenhagen (prior to 2006), he questioned the sustainability of Denmarkís growth and warned of the evolving dangers (documented and summarized in "No One Saw This Coming": Understanding Financial Crisis Through Accounting Models (page 41) by Dirk Bezemer).
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?
Most institutions had a stake. The Fed's aggressive monetary policy and the denial of the existence of a bubble, the government encouraged lenders to lend out to everybody, the government deficit that should have been a surplus given the high revenue from the boom, Wall street because it did not account for risk - and particularly systematic risk. Most of all economists are to blame. The free market fundamentalists (several Nobel price Laureates such as Sargent, Lucas, Merton, Miller, Prescott, etc.) advocated no bank regulations and that bubbles cannot exist. In macroeconomics everybody is indoctrinated with rational expectations and credit and asset markets and their failures are largely ignored.
3. I believe the Global Financial Crisis is ongoing andit will keep on going for years. It will end when the large private and government debt is partly unwound.
4. What were the primary causes of the Global Financial Crisis?Asset bubbles driven by excessive credit and low cost of capital that in turn was driven down by low price of risk.
5. What still should change as a result of the crisis?Banks need to be regulated more and government and private savings need to increase. We will never overcome the crises if the debt is not reduced.
Compiled by Gary Karz, CFA
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