The first global financial crisis of the 21st Century A VoxEU.org Publication
The First Global Financial Crisis of the 21st Century A VoxEU.org Publication
Centre for Economic policy research(CEPR) Centre for Economic Policy Research 53-56 Great Sutton Street London civ odg Tel:+44(02071838801 Fax:+44(02071838820 Email: cepr(cepr.org Websitewww.cepr.or o June 2008 Centre for Economic Policy Research British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN:978-0-95570093-4
Centre for Economic Policy Research (CEPR) Centre for Economic Policy Research 53-56 Great Sutton Street London EC1V 0DG UK Tel: +44 (0)20 7183 8801 Fax: +44 (0)20 7183 8820 Email: cepr@cepr.org Website: www.cepr.org © June 2008 Centre for Economic Policy Research British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-0-9557009-3-4
The First Global Financial Crisis of the 21st Century A VoxEU. org Publication ted by Andrew Felton and Carmen Reinhart
Edited by Andrew Felton and Carmen Reinhart The First Global Financial Crisis of the 21st Century A VoxEU.org Publication
Centre for Economic Policy Research(CEPR The Centre for Economic Policy Research is a network of over 700 Research Fellows and Affiliates, based primarily in European universities. The Centre coordinates the research activities of its Fellows and Affiliates and communicates the results to the public and private sectors. CEPR is an entrepreneur, developing research initiatives with the producers, consumers and sponsors of research. Established in 1983, CEPR is a European economics research organization with uniquely wide-ranging scope and activities The Centre is pluralist and non-partisan, bringing economic research of medium- and long-run policy questions. CEPR research may include views on policy, but the Executive Committee of the Centre does not give prior review to its publications, and the Centre takes no institutional policy positions. The opinions expressed in this report are those of the authors and not those of the Centre for Economic Policy research CEPR is a registered charity(No. 287287)and a company limited by guarantee and registered in England(No. 1727026) Chair of the board Guillermo de la dehesa resident Richard Portes Chief executive officer stephen Yeo Research Director Mathias Dewatripont Policy Director Richard baldwin
Centre for Economic Policy Research (CEPR) The Centre for Economic Policy Research is a network of over 700 Research Fellows and Affiliates, based primarily in European universities. The Centre coordinates the research activities of its Fellows and Affiliates and communicates the results to the public and private sectors. CEPR is an entrepreneur, developing research initiatives with the producers, consumers and sponsors of research. Established in 1983, CEPR is a European economics research organization with uniquely wide-ranging scope and activities. The Centre is pluralist and non-partisan, bringing economic research to bear on the analysis of medium- and long-run policy questions. CEPR research may include views on policy, but the Executive Committee of the Centre does not give prior review to its publications, and the Centre takes no institutional policy positions. The opinions expressed in this report are those of the authors and not those of the Centre for Economic Policy Research. CEPR is a registered charity (No. 287287) and a company limited by guarantee and registered in England (No. 1727026). Chair of the Board Guillermo de la Dehesa President Richard Portes Chief Executive Officer Stephen Yeo Research Director Mathias Dewatripont Policy Director Richard Baldwin
Contents Introduction Section 1 Why Did the Crisis Happen? 5 The relationship between the recent boom and the current delinquencies in subprime mortgages Giovanni Dell'Ariccia, Deniz igan and Luc Laeven Why bank risk models failed Avinash persaud Blame the models Jon Danielsson The subprime crisis: observations on the emerging debate The subprime series, part 1: Financial crises are not Stephen G. Cecchetti The subprime series, part 2: Deposit insurance and the lender of last resort Stephen G. Cecchetti The subprime series, part 3: Why central banks should be financial supervisors Stephen G. Cecchetti The subprime series, part 4: Does well-designed monetary policy encourage risk- taking? Stephen G. Cecchetti The subprime crisis: Greenspan's Legacy Tito Boeri and Luigi Guiso The impact of short-term interest rates on risk-taking: hard evidence Vasso P. loannidou, Steven Ongena and Jose Luis Peydro Why did bank supervision fail? Guido tabellini
Preface ix Introduction 1 Section 1 Why Did the Crisis Happen? 5 The relationship between the recent boom and the current 7 delinquencies in subprime mortgages Giovanni Dell’Ariccia, Deniz Igan and Luc Laeven Why bank risk models failed 11 Avinash Persaud Blame the models 13 Jon Danielsson The subprime crisis: observations on the emerging debate 17 Charles Wyplosz The subprime series, part 1: Financial crises are not 21 going away Stephen G. Cecchetti The subprime series, part 2: Deposit insurance and the 25 lender of last resort Stephen G. Cecchetti The subprime series, part 3: Why central banks should be 29 financial supervisors Stephen G. Cecchetti The subprime series, part 4: Does well-designed monetary 33 policy encourage risk- taking? Stephen G. Cecchetti The subprime crisis: Greenspan’s Legacy 37 Tito Boeri and Luigi Guiso The impact of short-term interest rates on risk-taking: 41 hard evidence Vasso P. Ioannidou, Steven Ongena and Jose Luis Peydró Why did bank supervision fail? 45 Guido Tabellini Contents