What Caused The Global Financial Crisis according to Robert E. Litan

The Global Financial Crisis according to Robert E. Litan

Robert Litan is Director of Research at Bloomberg Government. He previously worked at the Kauffman Foundation and at the Brookings Institution as a senior fellow and vice president of economic studies. Dr. Litan has served in a variety of federal agencies and White House posts, has authored or co-authored more than twenty books, edited another fourteen, and authored or co-authored more than 200 articles in journals, magazines, and newspapers on a broad range of public policy issues. Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity (2007 with William Baumol and Carl Schramm) has been translated into ten languages and is used as a college text around the world. He is also co-editor of After the Crash: The Future of Finance (with Yasuyuki Fuchita, Richard Herring) and coauthor of Financial Crises: Lessons from the Past, Preparation for the Future (2005 with Gerard Caprio and James Hanson). His 2009 article "Regulating Systemic Risk" can be read in Insights into the Global Financial Crisis from The Research Foundation of CFA Institute (or via Brookings Institute). You can also read his BusinessWeek article titled Turning Research into Inventions and Jobs (9/20/2009).

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?

“Everyone” was at fault: Wall Street, the government, and our wider society.

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?

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.

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

I am reasonably satisfied with Dodd-Frank as a broad outline, but we need clear and final rules relating to derivatives clearinghouses and their ownership. As a society, we also need to decide if and how to subsidize housing, and what to do with the GSEs. My inclination is to wind the GSEs down and provide means-tested, on budget, down-payment support for low to moderate income householders, recognizing that budgetary constraints may keep the size of those subsidies too small for many tastes. But one of the things we have learned from this crisis is that renting is not the bad social outcome it was previously thought to be – renting contributes to labor mobility, which can lead to lower unemployment rates and faster growth.

Compiled by Gary Karz, CFA
Host of InvestorHome

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