The Global Financial Crisis according to Viral Acharya

Global Financial Crisis Survey

Viral Acharya is a Professor of Economics in the Department of Finance at New York University Stern School of Business. He is a coauthor of Guaranteed to Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance. He also co-edited Restoring Financial Stability: How to Repair a Failed System (2009) and Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance (2010).

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

None of the 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?

“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?

The primary cause of the global financial crisis is that the externalities arising from a financial sector collapse and boom-bust cycles of aggregate markets such as residential housing were not adequately kept in check, in that, profits were privatized and losses were eventually socialized, resulting in great misallocation of resources, in a leveraged manner, to chasing a limited asset-class. Government-sponsored enterprises or state-owned banks were part of this excess - often explicitly required by governments to do so, but private sector financial firms also engaged in significant leverage and risk-taking. Declining growth in Western economies and availability of global surpluses to fund their fiscal deficits also contributed to the excess. But in one line, externalities or spillover effects from financial sector and housing sector meltdown were ignored through weakening of regulations, and in some cases their build-up was even explicitly encouraged for populist goals.

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

The financial sector recapitalization and to an extent its prudential regulation have improved. But this was a housing sector boom and bust as well, and no decisive measures have been taken in the United States and elsewhere to address this directly. Rather than stimulating the corporate sector and the financial sector further, a better fiscal stimulus would be to restore household equity on mortgages, and get the banks to take a one-time hit (and further recapitalize it if needed), so that both households can rebuild their consumption and demand and banks can get exonerated from the burden of a "zombie" asset class sitting on their balance-sheets and restricting their ability to lend freely until global growth prospects are restored (in some way).

Acharya also refers those interested in further explanation of his research and opinions to view his Books on the Crisis and Financial Sector Reforms and Short Articles and Interviews on the Crisis and Financial Sector Reforms where there are many posts also on what needs to be done to housing markets, why fiscal policies are currently not working, and so on.

Compiled by Gary Karz, CFA
Host of InvestorHome

Global Financial Crisis Survey

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