Testimony on the European debt and financial crisis

This Policy Contribution reproduces the written statement prepared by the author for the hearing "The European debt and financial crisis: origins, options and implications for the US and global economy" presented at the Subcommittee on Security and International Trade and Finance of the US Senate Committee on Banking, Housing,and Urban Affairs, on 22 September 2011. Europeâ??s banking system has been in a state of systemic fragility since 2007-08. The current phase is marked by a sequence of interactions between sovereign problems and banking problems, resulting in gradual contagion to more countriesand more asset classes. The banking and sovereign crises are compounded by a crisis of the European Union institutions. Successful crisis resolution will need to include at least four components at the European level, in addition to steps to be taken by individual countries: fiscal federalism; banking federalism; a profound overhaul of EU/euro-area institutions; and short-term arrangements that chart a path towards the completion of the previous three points. These requirements for crisis resolution cannot be met unless political conditions change sharply in their favour, which leaves the United States and the global economyexposed to the risk of financial contagion. However, only the Europeans themselves can solve their current predicament.

Lending of Last Resort, Moral Hazard and Twin Crises: Lessons from the Bulgarian Financial Crisis 1996/1997

In 1996/1997 Bulgaria was hit by a severe financial crisis, spreading from a banking crisis to a currency crisis. While being widely neglected by the financial crisis literature and the international discussion we argue that the Bulgarian Financial Crisis might serve as an illustrative example of a twin crisis primarily (but not only) due to systematic moral hazard behaviour of the banking sector. Thus, the Bulgarian Financial Crisis might be closer to the story of third generation moral hazard models of currency crises than the Asian Crisis. We also show how Bulgaria managed to overcome the crisis by introducing a second generation currency board allowing the central bank to act as a strictly limited lender of last resort thereby (hopefully) making the country less prone to a financial crisis in the future.http://deepblue.lib.umich.edu/bitstream/2027.42/39848/3/wp464.pd

Financial Crisis and Crisis Management in Sweden. Lessons for Today

This paper gives an account of the Swedish financial crisis covering the period 1985–2000, dealing with financial deregulation and the boom in the late 1980s, the bust and the financial crisis in the early 1990s, the recovery from the crisis and the bank resolution policy adopted during the crisis. The paper focuses on three issues: the causes and consequences of the financial crisis, the policy response concerning bank resolution, and the applicability of the Swedish model of bank crisis management for countries currently facing financial problems.financial crisis; crisis management; bank resolution; solvency crisis; banking crisis

Subprime Mortgage Lending as it Relates to the 2007-2009 Financial Crisis

The 2007-2009 financial crisis was the worst recession in recent economic history. The financial crisis has been the subject of much academic scrutiny, and many authors have arrived at different conclusions concerning the cause of the crisis and the effects. One of the most interesting real estate investments occurred during the crisis: certain investors and organizations predicted the bursting of the housing bubble and shorted real-estate backed securities, yielding huge profit. This paper will explore the financial crisis as well as the concurrent short selling to gain better understanding of financial markets, economic bubbles and recessions, and real-estate backed securities

Food, Financial Crises, and Complex Derivatives: A Tale of High Stakes Innovation and Diversification

The 2008 food price crisis was an integral part of the financial crisis. In fact, the food price crisis was the second crisis in a chain of events that began in 2007 with the mortgage crisis, and culminated in the worst financial crisis since the Great Depression. Contrary to what was generally believed in 2008, developing countries, particularly food-importing countries, were part of the early wave of the financial crisis via food price increases, and later suffered another wave via the real sector. The events leading up to the food crisis were global and complex in nature. As a result, as the G-20 discusses solutions to the financial crisis, any new framework must include developing countries, especially low-income countries. In addition, developing countries, especially in Africa, must pay close attention to the work of the Financial Stability Board (FSB) and its recommendations on financial market reform, and over-the-counter (OTC) derivatives in particular, because these reforms will have important consequences for their housing, food, fuel, financial markets, and ultimately their growth and poverty reduction objectives.food prices, food price crisis, financial crisis, derivatives, G-20, OTC, Africa, Financial Stability Board, developing countires, poverty reduction

Is this time different for Asia?: Evidence from stock Markets

The recent sub-prime financial crisis initially affected the Asian economy to a degree comparable to that of the downturn in the Asian financial crisis; however, the recovery in Asia took place at a much faster pace than during the Asian financial crisis. We investigate whether the effects of sub-prime financial crisis on 13 Asian economies are similar to those of the previous crisis, by examining stock markets for volatility spillovers and causality directions between the US and Asia as well as for the degree of regional integration. The empirical evidence indicates stark differences between these two crises. First, the decline in volatility spillovers during the period of financial turmoil was more pervasive for the Asian financial crisis. Second, the estimated point of transition in correlation is indicative of market participants’ awareness of the upcoming stock market crash in September 2008. Third, the causality from the epicenter of crises is intensified during crisis. Fourth, regional integration was strengthened after the financial turmoil of the recent sub-prime financial crisis but not after the Asian financial crisis.Asia, Contagion, Financial crisis, Spillover, Stock market integration.

What’s the Problem, Mr. President?: Bush’s Shifting Definitions of the 2008 Financial Crisis

A case study is presented which examines the political rhetoric of U.S. President George W. Bush concerning the Global Financial Crisis of 2008-2009. Topics include Bush\u27s definition of the economic crisis, his reluctance to recognize the existence of the financial crisis and the relationship between his rhetoric on the financial crisis and his legacy

Origins and Resolution of Financial Crises; Lessons from the Current and Northern European Crises

Since July 2007 the world economy has experienced a severe financial crisis originating in the U.S. housing market. The crisis has subsequently spread to the financial sectors in European and Asian economies and led to a severe worldwide recession. The existing literature on financial crises rarely distinguish between factors that create the original strain on the financial sector and factors that explain why these strains lead to system-wide contagion and a possible credit crunch. Most of the literature on financial crises refers to factors that cause an original disruption in the financial system. We argue that a financial crisis with its contagion within the system is caused by failures of legal, regulatory and political institutions. One policy implication of our view is that the need for various forms of rescues of financial firms in times of crises would be reduced if appropriate institutions could be put in place Lacking appropriate institutions to avoid contagion within the financial system and a potential credit crunch, ad hoc financial crisis management is required. We draw on experiences from the financial crises in the Nordic countries at the end of the 1980s and the beginning of the 1990s. In particular, the Swedish model for crisis resolution, which has received attention during the current crisis, is discussed in order to illustrate the problems policy makers face in a financial crisis without appropriate institutions. Current European Union approaches to the crisis are discussed before turning to policy implications from an emerging market perspective in the current crisis.Financial Crisis; Institutional Failure; Insolvency Procedures; Contagion; Systemic Effects; Macroeconomic Shock; Financial Crisis Management; Swedish Model