The global economy has entered what appears to be a very serious financial crisis for reasons other than force majeure. While the current focus has to be on preventing a repeat of the Great Depression, efforts must also be made to understand why the crisis came about in the first place. The objective of this paper is to demonstrate that the regulators should have known what the risks were and that these risks were large and systemic, and should have concluded that actions were required to prevent a serious global crisis.
The article analyzes the developments in the US mortgage market to assess whether the chances of a crisis in the period before the crisis could have been assessed to be too remote to warrant concern.
The evidence seems quite clear that, given the assessments of potential consequences of previous episodes in which concerted actions had to be taken to prevent the collapse of the global financial system, the regulators of the US economy should have taken steps long before the onslaught of chains of collapse of financial institutions that began in the summer of 2007.
It is hoped that analysis such as this will lead to improvement of regulations of financial markets, reducing chances of future crises of such proportions.
