The Global Financial Crisis according to Matthew Watson

Global Financial Crisis Survey

Matthew Watson is Professor of Political Economy in the Department of Politics and International Studies at the University of Warwick, UK. Since 2013 he is also an ESRC Professorial Fellow working on the project 'Rethinking the Market'. He is the author of Uneconomic Economics and the Crisis of the Model World.

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

None of the Three Views.

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 Wall Streetís fault.

3. I believe the Global Financial Crisis is ongoing - certainly in the experience of austerity, the erosion of the real wage and diminished life chances.

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

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.

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

The regulatory response to the crisis has been almost entirely derailed by the lobbying power of the finance industry. Nothing much has consequently changed, and much of what was wrong with the banking sector before the crisis is still wrong with it today. This isn't just about tweaking the existing settings of policy as if some sort of simple technical fix is possible. It means changing the whole culture of finance to make it at once both more amenable to democratic decision-making and more humane in the costs that it is willing to distribute around the rest of the economy in pursuit of profits. It also means changing the basic mindset of orthodox economics opinion. It is no longer credible - if it ever were - to rely so single-mindedly on the auto-corrective capacities of markets that are prone to capture by the interests of the finance industry.

Compiled by Gary Karz, CFA
Host of InvestorHome

Global Financial Crisis Survey

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