The Lehman Brothers collapse in September 2008 – the biggest bankruptcy filing in U.S. history, with Lehman holding over $600 billion in assets -was a representative milestone for the Global Financial Crisis. Yet, seven years on we still can’t agree on the exact causes of the GFC, the largest financial crisis since the 1929 stock market crash.
In the Journal of Economic Literature, MIT Sloan Professor of Finance Andrew Lo reviews 21 books on the GFC, written by academics, journalists and policymakers. His conclusion: “no single narrative emerges from a broad and often contradictory collection of interpretations.”
Some blame the corrupted incentives of predatory lending, with the US subprime mortgage industry, obscure security bonds and biased rating evaluations as chief examples; some say fraud and lack of regulation – or even capitalism itself – are the true culprit; on the other polarity, the excess of government regulation and intervention (e.g. the distortions caused by government-backed Fannie Mae and Freddie Mac on the US housing market) are in the dock; others attack global imbalances leading to distorted international trade accounts, as well as reckless fiscal spending and high private and public financial leverage.
In short, that we cannot agree on the causes of the GFC is in itself quite telling about the current challenges to global growth. Albeit the tremendous fiscal and monetary efforts to revive the global economy, growth is at best lukewarm and fragile. Or worse: our ability to fight the next recession is deeply undermined, with little wriggle room to promote further expansionary government measures.
For Australia, this means we should be engaging in deep structural reforms to improve our resilience. Accordingly, it is high time we fix our outdated tax system and industrial relations, and insert more competition in our domestic markets.
We might not agree on the causes of the last crisis, but we can still agree much has to be done to prepare for the next one.
Home > Commentary > Opinion > Seven years and no clear answers
Seven years and no clear answers
In the Journal of Economic Literature, MIT Sloan Professor of Finance Andrew Lo reviews 21 books on the GFC, written by academics, journalists and policymakers. His conclusion: “no single narrative emerges from a broad and often contradictory collection of interpretations.”
Some blame the corrupted incentives of predatory lending, with the US subprime mortgage industry, obscure security bonds and biased rating evaluations as chief examples; some say fraud and lack of regulation – or even capitalism itself – are the true culprit; on the other polarity, the excess of government regulation and intervention (e.g. the distortions caused by government-backed Fannie Mae and Freddie Mac on the US housing market) are in the dock; others attack global imbalances leading to distorted international trade accounts, as well as reckless fiscal spending and high private and public financial leverage.
In short, that we cannot agree on the causes of the GFC is in itself quite telling about the current challenges to global growth. Albeit the tremendous fiscal and monetary efforts to revive the global economy, growth is at best lukewarm and fragile. Or worse: our ability to fight the next recession is deeply undermined, with little wriggle room to promote further expansionary government measures.
For Australia, this means we should be engaging in deep structural reforms to improve our resilience. Accordingly, it is high time we fix our outdated tax system and industrial relations, and insert more competition in our domestic markets.
We might not agree on the causes of the last crisis, but we can still agree much has to be done to prepare for the next one.
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