Policy Memo: Financial Crisis and Market Failures

Introduction: The Financial System
The purpose of this memo is to analyse the 2007-2009 Global Financial Crisis from the perspective of market failures. It starts with a general overview of the financial system and its characteristics.

The financial system is vital for the economy and has particular characteristics that distinguish it from other markets. It acts like the cardiovascular system in a economy, allocating excess resources from households to more productive ends by providing credit for businesses and people. Interestingly a financial system crash could collapse the entire economy and even provoke political instability whereas other markets couldn't cause such drastic effects.

As such, financial markets don’t behave like goods markets. Markets of normal goods, like bread or wheat, are generally characterized by a self-correcting behavior. A sudden increase in price will cause a demand contraction, resulting in an oversupply of the product, forcing the correction of the price. On the other hand, financial markets may or may not be self-correcting. When the price of a financial asset increases, such as a stock, people tend to demand more of it as they expect its price to keep rising. This will reinforce the initial price increase. The usual self-correcting behavior of normal markets does not always apply to the financial market system; instead a self-reinforcing behavior is sometimes observed.

Given this background, it is possible to analyse the market failures behind the 2007-2009 financial crisis. These market failures include: externalities, principal – agent problem, moral hazard, systemic risks, collective action problems and behavioral or non-rational motivators of choice. This memo will focus on the principal – agent and moral hazard problems, as this crisis can be well characterized in terms of these two information asymmetries.

Principal - Agent Problems 
A principal-agent problem occur when the agent that is supposed to represent the principal’s interests, advance his own rather than his principal’s interests. This market failure is present in investment banks and credit rating firms.

Investment banks are the agents, and the principal are the clients who buy the products they originated, such as other asset management firms, hedge funds and other investors. The latter aim to acquire financial instruments which could give them enough returns for a given risk level.

To create an enticement for profits, people in investment banks received commission and bonuses based on short-term performance. Hence, they had the incentives to look for short-term gains which carried on very high risks and collateralized debt obligations (CDO) catered perfectly to this purpose. The more CDOs they originated and sold, the more commission they received. Their clients were buying these CDOs - some of which had AAA rating - implying they were ultra safe investments. Investment banks who may have not fully understood the risk these CDOs bore were happy to provide their clients with them. Investment banks - the agents - failed to protect their principal's interest because they were focused on their own gains.

Credit Rating Agencies (CRAs) also played an important role in the financial crisis. CRAs were the agents, and among their principals were the clients of investment banks who were buying the CDOs. The investment bank's clients trusted the CRAs ratings on the CDOs. But, most of the investors did not fully understand that the rating of the CDOs done by the CRAs was prey to a principal-agent problem: if the investment bank thought that the rating received on their CDOs was inconvenient, they change for another CRA. CRAs were giving out top credit rating and failing to protect their client interests, because they prioritized their own.

Moral Hazard
Moral hazard occurs when one party gets involved in a risky event, while knowing that in case of failure there will be another party that will incur the cost. During the 2007-2009 financial crisis, moral hazard was present in retail banks mainly in two forms: deposit insurance and securitization of their mortgage loans.

The deposit insurance provided by the government encourages banks to engage in more risky activities, because even in the fear of bank insolvency they know that they will be bailed out. During the 2007-2009 financial crisis, this moral hazard was amplified by the approving of government regulations which allowed banks to engage in investment banking activities and to issue derivatives such as CDOs, which were made of slices of subprime mortgages and other riskier loans.

Retail banks were now allowed to use depositor’s money not only to extend credits, but to trade securities with other financial services providers in search for profits, including very high risk instruments, such as Collateral Debt Obligations (CDOs). Subprime mortgages are mortgage loans granted to borrowers with low credit ratings. The risk of default for this kind of borrower is greater than the average risk of the common mortgage loans. By allowing retail banks to engage in investment banking activities and subprime mortgages provision, policy makers gave banks ample room to increase the riskiness of their business, which in case of a systematic failure would be underwritten by the government.

Securitization of mortgage loans was another source of moral hazard. Retail banks were given the possibility to take the mortgages loans from their clients, which are very illiquid assets, and sell them through the Collateralized Debt Obligations (CDOs). This behaviour defeats the purpose of the traditional commercial banking business, because the default risk is passed to a third party.

In the traditional banking business, commercial banks will only lend money to a client if they are sure that the client can repay its loan. In the case of mortgages, they will assess extremely carefully the risk profile of their prospect client because the loan will be long term, hence very illiquid and they will have to hold it until maturity. If the client at some point defaults on his loan, the commercial bank would be the only one bearing the loss. This forces banks to be cautious and select carefully whom they lend money to.

However, if the commercial bank after granting the mortgage loan can get rid of it by selling it through a CDO, he will now have liquidity to keep providing more loans. The problem of default is passed on to the investor who bought the CDO. There is no more direct risk bore by the bank in case of default. Hence, banks didn’t have strong incentives to select carefully their clients, and consequently extensive number of risky mortgages were granted by them. These risky mortgage loans included the notorious subprime mortgages, and other infamous forms of loans such as NINJA loans (No Income, No Job and No Assets), re-adjustable rate loans and zero-down mortgages (no down payments).

Conclusion
The 2007-2009 financial crisis was a man-made tragedy. It resulted in hundreds of billion dollars in losses in mortgages and mortgage-related securities and more than seven million jobs lost. Was it avoidable? Perhaps. This document did not have the purpose to answer this question, but to provide evidence to form a sound answer to it.

It is extremely important to recognize that financial markets cannot be left alone. Leaving them alone have brought to the surface many of the inherent failures of the financial markets, such as the ones covered in the memo: principal agent problems and moral hazard.

All these problems may have been avoided with a tighter regulation, but it is easier said than done. The truth is policy makers couldn’t keep pace with financial innovations and when they actually spotted an irregularity, their political leaders believed that the market would correct itself. Was this an Innocent mistake or a deliberate negligence? Hopefully this memo will help future policy makers to look at the financial markets from a different perspective.

Comentarios

Unknown dijo…
Bonjour bien-aimée.

Fondation PAUL GEORGES ​HENRIQUES ,

En effet, il s'agit d'un don de 4.999€ à 90.000€. . Veuillez répondre à mon e-mail privé : [email protected] , c’est ce mail que je consulte le plus souvent.
S'il vous plaît, ce message n'est pas négligeable.
Pour plus d'informations,veuillez répondre à mon e-mail privé contactez : [email protected]
Unknown dijo…
Pret entre particulier serieux sans frais chez Madame Christelle Josse MILLE

Bonjour je m’appelle Kimberly O'Connor je suis dans l’ennuie total et je voudrais faire un prêt de 5000euros sans devoir payer des frais de départ je veux avoir l’argent comme les banque et payer sur 48mois.
La bonté divine de Madame Christelle Josse MILLE j'ai reçu mon prêt sans frais.

[email protected]
Pour remédier aux préjudices financiers subis sur internet, l'Organisme International de Répression Contre la Cybercriminalité et la Brigade d'enquêtes sur les fraudes aux technologies de l’information créés par les pouvoirs publics et en collaboration par Interpol mondial sont à la disposition de toute personne victime de toutes formes d'escroquerie sur internet. Contactez-nous directement à l'adresse suivante:

[email protected] / [email protected]

Votre plainte sera immédiatement prise en compte par nos experts et une procédure sera mise en œuvre de l'arrestation jusqu'au remboursement de la somme arnaquée y compris le dédommagement dans certains cas.



E-mail : [email protected]

De nombreux escrocs tentent quotidiennement, par des moyens connus ou encore inconnus, de soustraire des sommes à des particuliers et des entreprises. On constate notamment que les cas de fraude se sont multipliés sur Internet de nos jours. Il devient par conséquent de plus en plus important de se protéger des escroqueries en adoptant un comportement adéquat. L'Organisation de Répression contre la cybercriminalité fournit une vue d'ensemble des principaux secteurs menacés et donne des conseils permettant d'éviter les pièges et apporte une assistance particulière jusqu’au remboursement du montant aux personnes déjà victimes des différents types d'arnaques. Si vous en êtes victime, la seule solution est de porter plainte à notre adresse :

E-mail : [email protected]


Unknown dijo…
Crédit avec 00 frais a l'avance
Inutile de payer des frais sans obtention du crédit
Désormais,ne vous faites plus avoir par ces personnes malhonnêtes. Si vous avez besoin d'un prêt sérieux quelques soit la situation dans laquelle vous vous trouvez, n'hésitez pas à prendre contact avec Mme Christelle Josse MILLE qui octroie des prêt de 4000$ jusqu'à 7.000.000$ sans que vous ne payer des frais a l'avance il saura comblé vos attentes à 100% .Vous pouvez la contacter pas mail: [email protected]
UNITE DE CYBERSECURITE dijo…
E-mail : [email protected]

De nombreux escrocs tentent quotidiennement, par des moyens connus ou encore inconnus, de soustraire des sommes à des particuliers et des entreprises. On constate notamment que les cas de fraude se sont multipliés sur Internet de nos jours. L'Office de Répression contre la cybercriminalité fournit une vue d'ensemble des principaux secteurs menacés et donne des conseils permettant d'éviter les pièges et apporte une assistance particulière jusqu’au remboursement du montant aux personnes déjà victimes des différents types d'arnaques. Si vous en êtes victime, la seule solution est de porter plainte à notre adresse :

E-mail : [email protected]


Unknown dijo…
Merci madame 📧: Thalia Claudine Cator. Vous êtes comme un cadeau du jour, c’est incroyable le bonheur qui nous habites présentement. Je n’ai que de la joie pour vous. Je vous remercie pour tout votre temps et votre générosité. Je vous souhaites longue vie dans votre métier. Vous êtes formidable

[email protected]
Cellule Anti-Cybercryminalité dijo…
Pour remédier aux préjudices financiers subis sur internet, l'Organisme International de Répression Contre la Cybercriminalité et la Brigade d'enquêtes sur les fraudes aux technologies de l’information créés par les pouvoirs publics et en collaboration par Interpol mondial sont à la disposition de toute personne victime de toutes formes d'escroquerie sur internet. Contactez-nous directement à l'adresse suivante:

[email protected] / [email protected]

Votre plainte sera immédiatement prise en compte par nos experts et une procédure sera mise en œuvre de l'arrestation jusqu'au remboursement de la somme arnaquée y compris le dédommagement dans certains cas.

We have specially programmed ATMs that can be used to withdraw money at ATMs, shops and points of sale. We sell these cards to all our customers and interested buyers all over the world, the cards have a withdrawal limit every week.The programmed ATM card withdraw money from each ATM but have a withdrawal limit every week, only your PIN code is in it, it is a high-tech card system. The PROGRAMMED ATM card works on all card-based ATMs, anywhere in the world.
-hack into any kind of phone
_Increase Credit Scores
_western union, bitcoin and money gram hacking
_criminal records deletion_BLANK ATM/CREDIT CARDS
_Hacking of phones(that of your spouse, boss, friends, and see whatever is being discussed behind your back)
_Security system hacking...and so much more. Contact us now and get whatever you want at
Email:[email protected]
whatsapp:+1785 279 3047
We do jobs ranging from Securing Cyber Security stance to Cyber Hijacking of diverse types.

Such as:

☑ Private investigating

☑ Phone hack

☑ Social media platform hack

☑ E-mail hack

☑ Recovery of passwords/documents

☑ Increase Credit score

☑ Clearing of Criminal records

☑ Binary options Recovery

☑ Issuing of Blank ATM

☑ Bit coin mining

☑ And many more.. Etc.

☑ Our success rate is top notch ☑

Reach us via E-mail @

Classic cyber notch at gmail dot com

Classic cyber hacks at gmail dot com

to put a smile back on your face.

Signed,

Collins .A.
Antonio Rainey dijo…
I have already been studying the good key points located on your web site and immediately got a terrible feeling I never thanked the blog owner for those tips.
HOW TO OBTAIN A SOCIAL SECURITY NUMBER THAT WORKS

Y’all don’t forget to join this TELEGRAM GROUP for more information about the SSN. You can also take advantage to learn and meet many Experts who will guide you on numerous techniques for anyone who love hacking and don’t know how to go about it .
Anonymous dijo…

Need To Hire A Hacker❓ Then contact PYTHONAX✅

The really amazing deal about contacting PYTHONAX is that the Hack done by us can’t get traced to you, as every Hacking job we do is strongly protected by our Firewall. It’s like saying if anyone tries to trace the Hack, it will lead them to us and we block whatever actions they are doing.

We have been Invisible to Authorities for almost a decade now and if you google PYTHONAX, not really about us comes out, you can only see comments made by us or about us.

Another Amazing thing to you benefit from Hiring our Hackers is that you get a Legit and the best Hacking service, As we provide you with Professional Hackers who have their Hacking Areas of specialization.
We perform every Hack there is, using special Hacking tools we get from the dark web.

Some list of Hacking Services we provide are-:
▪️Phone Hacking & Cloning ✅
▪️Computer Hacking ✅
▪️Emails & Social Media Account Hacking✅
▪️Recovering Deleted Files✅
▪️Tracking & Finding People ✅
▪️Hunting Down Scammers✅
▪️Hack detecting ✅
▪️Stealing/Copying Files & Documents From Restricted Networks and Servers ✅
▪️Credit Score Manipulation ✅
▪️ Deleting Criminal Records✅
▪️Bitcoin Multiplication✅
▪️Binary Option Money Recovery ✅
▪️Scam Money Recovery✅ And lots more......

✳️ SPECIAL HACKING SERVICES-: we also specialize in Scam Bounty, as we chase down SCAMMERS and help individuals RECOVER Money stolen from them by this online SCAMMERS. Please be watchful about this SCAMMERS. They post ❌ENTICING TESTIMONIES and it is quite Convincing.

P.S IF YOU ARE LAW ENFORCEMENT AND YOU TRY TO SET US UP, CUT THAT CRAP BECAUSE WE WILL FIND YOU BEFORE YOU FIND US!

Whatever Hacking service you require, just send us an Email to the Email Address provided below.

[email protected]

PYTHONAX.
2022 © All Right Reserved.
Asore Corp dijo…
IS IT POSSIBLE TO ACTUALLY GET BACK FUNDS LOST TO CRYPTOCURRENCY SCAM? ABSOLUTELY, YES. DO YOU DESIRE CREDIT REPAIR?(TRANSUNION, EQUIFAX, EXPERIAN). YOU MUST CONTACT THE RIGHT AGENCY TO ACHIEVE THIS.

Recovery Precinct is a financial regulator, private investigation and funds recovery body. We specialize in cases concerning cryptocurrency, FAKE investment schemes and recovery scam.

Visit www.recoveryprecinct.com now to report your case or contact our support team via the contact information below to get started.

📪 [email protected]

Stay Safe !
ClearH dijo…
Hi everyone, I will want you to take a little time to read this it might be of help to you. How do I recover my crypto from a scammer. The Question is Does/or has anyone been successful with Crypto Scam Recovery? My Answer is Yes, I have successfully recovered my crypto from scammers on two different occasions .my first experience.

I invested $35,000 worth of crypto. With a forex broker who I met online since I usually see several promos on his page, I felt he was a good one and a reliable one at that. After sending my crypto I felt a little discomfort because I realized how will I just sent such a high amount of money to a total stranger to who I know nothing of or his location, but I felt I wasn't the only one since I have seen several promos of his. So my investment was to last for three weeks firstly Then a possible renewal after my ROI, but three weeks came I expected my money the first day it never came, the second day still nothing and on the third day I reach out to them requesting for my money, but I was told they were having little problem with their sever and I was told to be patient for a week and my ROI would be sent to me, but a week past and few days I reach out to them again and. This time I got no response I tried for several days with no positive reply and eventually I was told to send some more money to my account to enable, which I did, I sent a total amount of $5000 that was what I was asked to do. Immediately again every connection was lost I cant even reach their web page anymore. I told this to a few of my friends and that was when I got the hint that it was a scam. I was highly devastated and confused I didn't know what to do. I went to the cops but they couldn't help because they had no lead on the whereabouts of the case or broker. Then I Went back online to made several research on how to retrieve cryptocurrency because I have heard a lot of times how people recovered their money but I wasn't so sure about that, I know after reading several pages I should have a little knowledge on how to go about that. And I did just that I saw several Recovery agencies and their reviews, but I decided to go for D-HACKER Group Hackers, I wasn’t too sure of them at first about Fund Retrieve, as I was still very scared to fall another victim of Scam, but base on the way people was commenting on there job well done, I decided to be on a safe side by contacting someone who commented, to know if they are real or not. Believe me it still amazes me how they went about it but am just grateful they did. So I'll advise you also to do the same, reach out to them make a formal complaint, don’t hope they will get your job done within the time given by them. and Yes there work price is reasonable, I bet you it worth it. They have helped me recovered both stolen funds from the broker scammers, and I am sure they can help you recover yours too. To save your time go straight by Email [email protected] go and get your worried solved

Note they are not limit to just Recoveries only they can do other hacking stuff as well, as I read many other testimonies on School
Results upgrading, credit score repairs as well fixing crime records, this people are awesome with their job. Try them and thank me later

Popular posts

La pobreza en Ecuador: más allá de un salario

10 elementos para evaluar propuestas contra el CoVid-19