Four myths and a financial crisis

Abstract

:The main driving force of the financial crisis of 2007-2009 was a rapid deterioration of the trust of private agents in the quality of financial institutions. In turn, this loss of confidence entailed the collapse of several key asset markets and a sharp decline in the other asset prices. This paper surveys the critical moments of the crisis, puts forward some of the shock amplifying mechanisms and comments on the effectiveness of various policy measures. The conclusion opens the debate on what structural changes in the existing financial architecture are required to contain such crises in the future. Key-Words:-Banking Sector -Economic Myths -Economic Policy -Financial Crisis -Trust RESUME :L'article retrace les moments critiques de la crise financière [2007][2008][2009], étudie les mécanismes de propagation des chocs, évalue les politiques économiques mises en oeuvre pour faire face à cette crise. The main driving force of the financial crisis of 2007-2009 was a rapid deterioration of the trust of private agents in the quality of financial institutions. In turn, this loss of confidence entailed a sharp decline in many asset prices and brought to their knees several large financial institutions with centennial tradition. This paper surveys the critical moments of the crisis, presents some of the shock amplifying mechanisms and comments on the effectiveness of various policy measures. We point out four conceptual myths that did not survived to this crisis. The conclusion opens the debate on what structural changes in the existing financial architecture are required to contain such crises in the future. Mots-clés :-Keywords: Financial crisis; Trust; Economic myths; Banking sector; Economic policy. JEL Classification: E65, G20This is a preprint of an article accepted for publication in the Thunderbird International Business Review, Wiley Publishers, March 2011, Vol. 52/2. 2 IntroductionThis last crisis that some observers refer to as the Great Recession began in the summer of 2007 with reassessment of the risk on subprime American mortgage loans, then turned into a genuine banking system crisis in the US and Europe, ending up as a full-blown real economic crisis affecting most countries in the world by late 2008. 1 Overall, in 2009 the GDP has declined by 2.5% in the United States, 5.3% in Japan and 3.9% in the Euro Area. Unemployment reached levels not seen since the major oil shocks in the 70s, and the fiscal position of many developed countries deteriorated dramatically. The situation is well summarized by Miller and Stiglitz (2010, p.500), "From 2007 to 2009 a chain of events, beginning with unexpected losses in the US-subprime market, was destined to bring the global financial system close to collapse and to drag the world economy into recession".There have of course been other banking crises in the past (at least thirty major crises of the type were recorded between 1980 and 1996), generating substantial private and social costs (Demigüç-Kunt and Detragiache, 1998;Reinhart and Rogoff, 2008)....

Adaptive Challenges Require Adaptive Leaders

“…The financial crisis threatened the global financial system, which was in a state of disequilibrium (Thakor, ). There is no real consensus as to the causes of the crisis; however, Thakor () pointed out some contributing factors (Vranceanu, ). Financial institutions enjoyed a period of profitability and growth that led to increased risk (Thakor, ).…”

“…Financial institutions enjoyed a period of profitability and growth that led to increased risk (Thakor, ). These institutions (e.g., JP Morgan Chase, Citigroup, and Bank of America) suffered financial, reputational, and credibility losses (Vranceanu, ; Weber et al., ). Regulatory agencies (i.e., the Consumer Financial Protection Bureau (CFPB) and the Department of Justice) and diminishing stakeholder (i.e., customers, stockholders, and employees) sentiment threatened the organization's stability (Thakor, ; Weber et al., ).…”

“…Jankowicz () believed an organization must be able to change if it is to face the challenges of operating in complex environments. Consider the complex environment resulting from the financial crisis of 2007–2009 (Nelson & Katzenstein, ; Poole, ; Thakor, ; Vranceanu, ). Financial institutions lost market share and credibility with consumers and analysts (Vranceanu, ; Walter, ; Weber, Erickson, & Stone, ).…”

“…Consider the complex environment resulting from the financial crisis of 2007–2009 (Nelson & Katzenstein, ; Poole, ; Thakor, ; Vranceanu, ). Financial institutions lost market share and credibility with consumers and analysts (Vranceanu, ; Walter, ; Weber, Erickson, & Stone, ). As the crisis unfolded, it became evident that an overhaul of existing regulatory policies was necessary (Nelson & Katzenstein, ; Poole, ; Thakor, ; Vranceanu, ; Weber et al., ).…”

“…Financial institutions lost market share and credibility with consumers and analysts (Vranceanu, ; Walter, ; Weber, Erickson, & Stone, ). As the crisis unfolded, it became evident that an overhaul of existing regulatory policies was necessary (Nelson & Katzenstein, ; Poole, ; Thakor, ; Vranceanu, ; Weber et al., ). Organizations faced uncertainty and needed appropriate responses.…”