Lessons from the Financial Crisis – Causes, Consequences, and Our Economic Future

ROBERT W. KOLB is the Frank W. Considine Chair of Applied Ethics and Professor of Finance at Loyola University, Chicago. Before this, he was the assistant dean, Business and Society, and director, Center for Business and Society, at the University of Colorado at Boulder and department chairman at the University of Miami. Kolb has authored over twenty books on finance, derivatives, and futures, as well as numerous articles in leading finance journals.

Acknowledgments. Editor's Note. Introduction. PART I Overview of the Crisis. 1 Leverage and Liberal Democracy ( George Bragues ). 2 A Property Economics Explanation of the Global Financial Crisis ( Gunnar Heinsohn and Frank Decker ). 3 Of Subprimes and Sundry Symptoms: The Political Economy of the Financial Crisis ( Ashok Bardhan ). 4 The Political Economy of the Financial Crisis of 2008 ( Roger D. Congleton ). 5 The Global Financial Crisis of 2008: What Went Wrong? ( Hershey H. Friedman and Linda Weiser Friedman ). 6 The Roots of the Crisis and How to Bring It to a Close ( James K. Galbraith ). 7 Enron Rerun: The Credit Crisis in Three "Easy" Pieces ( Jonathan C. Lipson ). 8 The Global Crisis and Its Origins ( Peter L. Swan ). 9 Four Paradoxes of the 2008-2009 Economic and Financial Crisis ( John E. Marthinsen ). 10 Understanding the Subprime Financial Crisis ( Steven L. Schwarcz ). PART II Causes and Consequences of the Financial Crisis. 11 The Origins of the Financial Crisis ( Martin N. Baily, Robert E. Litan, and Matthew S. Johnson ). 12 Ten Myths about Subprime Mortgages ( Yuliya Demyanyk ). 13 The Financial Crisis: How Did We Get Here and Where Do We Go Next? New Evidence on How the Crisis Spread Among Financial Institutions ( James R. Barth, Tong Li, Wenling Lu, and Glenn Yago ). 14 A Decade of Living Dangerously: The Causes and Consequences of the Mortgage, Financial and Economic Crises ( Jon Garfinkel and Jarjisu Sa-Aadu ). 15 Making Sense of the Subprime Crisis ( Kristopher Gerardi, Andreas Lehnert, Shane M. Sherlund and Paul Willen ). 16 Miraculous Financial Engineering or "Legacy" Assets? ( Ivo Pezzuto ). 17 The Making and Ending of the Financial Crisis of 2008-2009 ( Austin Murphy ). 18 The Subprime Mortgage Problem: Causes and Likely Cure ( Ronald D. Utt ). 19 Sequence of Asset Bubbles and the Global Financial Crisis ( Abol Jalilvand and A.G. (Tassos) Malliaris ). PART III Borrowers. 20 The Past, Present, and Future of Subprime Mortgages ( Shane M. Sherlund ). 21 FHA Loans and Policy Responses to Credit Availability (Dr. Marsha Courchane, Rajeev Darolia, and Dr. Peter Zorn ). 22 The Single-Family Mortgage Industry in the Internet Era: Technology Developments and Market Structure ( Forrest Pafenberg ). 23 Speed Kills? Mortgage Credit Boom and the Crisis ( Giovanni Dell'Ariccia, Deniz Igan, and Luc Laeven ). 24 Subprime Mortgages: What Have We Learned from a New Class of Homeowners ( Todd Zywicki and Satya Thallam ). 25 Rating Agencies: Facilitators of Predatory Lending in the Subprime Marke ( David J. Reiss ). PART IV The Process of Securitization. 26 A Primer on the Role of Securitization in the Credit Market Crisis of 2007 ( John D. Martin ). 27 Incentives in the Originate-to-Distribute Model of Mortgage Production ( Robert W. Kolb ). 28 Did Securitization Lead to Lax Screening? Evidence from Subprime Loans ( Benjamin J. Keys, Tanmoy Mukherjee, Amit Seru, and Vikrant Vig ). 29 Tumbling Tower of Babel: Subprime Securitization and the Credit Crisis ( Bruce I. Jacobs ). 30 The Incentives of Mortgage Servicers and Designing Loan Modifications to Address the Mortgage Crisis ( Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, and Eileen Mauskopf ). 31 The Contribution of Structured Finance to the Financial Crisis ( Adrian A.R.J.M. van Rixtel and Sarai Criado ). 32 Problematic Practices Of Credit Rating Agencies: The Neglected Risks Of Mortgage-Backed Securities ( Phil Hosp ). 33 Did Asset Complexity Trigger Ratings Bias? ( Vasiliki Skreta and Laura Veldkamp ). 34 The Pitfalls of Originate-to-Distribute in Bank Lending ( Antje Berndt and Anurag Gupta ). PART V Risk Management and Mismanagement. 35 Behavioral Basis of the Financial Crisis ( J.V. Rizzi ). 36 Risk Management Failures During the Financial Crisis (Dr. Michel Crouhy ). 37 The Outsourcing of Financial Regulation to Risk Models ( Erik F. Gerding ). 38 The Future of Risk Modeling ( Elizabeth Sheedy ). 39 What Happened to Risk Management During the 2008-09 Financial Crisis? ( Michael McAleer, Juan Angel Jimenez-Martin, Teodosio Perez-Amaral ). 40 Risk Management Lessons from the Global Financial Crisis for Derivative Exchanges ( Jayanth Varma ). PART VI The Problem of Regulation. 41 Regulation and Financial Stability in the Age of Turbulence ( David S. Bieri ). 42 The Financial Crisis of 2007-09: Missing Financial Regulation or Absentee Regulators? ( George Kaufman and A.G. Malliaris ). 43 The Demise of the United Kingdom's Northern Rock and Large U.S. Financial Institutions: Public Policy Lessons ( Robert A. Eisenbeis and George G. Kaufman ). 44 Why Securities Regulation Failed to Prevent the CDO Meltdown ( Richard E. Mendales ). 45 Curbing Optimism in Managerial Estimates through Transparent Accounting: The Case of Securitizations ( Stephen Bryan, Steven Lilien, and Bharat Sarath ). 46 Basel II Put on Trial: What Role in the Financial Crisis ? ( Francesco Cannata and Mario Quagliariello ). 47 Credit Rating Organizations, Their Role in the Current Calamity, and Future Prospects for Reform ( Thomas J. Fitzpatrick, IV and Chris Sagers ). 48 Global Regulation for Global Markets? ( Michael W. Taylor and Douglas W. Arner ). 49 Financial Regulation, Behavioral Finance, and the Global Financial Crisis: In Search of a New Regulatory Model ( Emilios Avgouleas ). PART VII Institutional Failures. 50 Why Financial Conglomerates Are at the Center of the Financial Crisis ( Arthur E. Wilmarth ). 51 Corporate Governance and the Financial Crisis: A Case Study from the S&P 500 ( Brian R. Cheffins ). 52 Secondary-Management Conflicts ( Steven L. Schwarcz ). 53 The Financial Crisis and the Systemic Failure of Academic Economics ( David Colander, Michael Goldberg, Armin Haas, Alan Kirman, Katarina Juselius, Brigitte Sloth and Thomas Lux ). 54 Fannie Mae and Freddie Mac: Privatilizing Profit and Socializing Loss ( David Reiss ). 55 Disclosure's Failure in the Subprime Mortgage Crisis ( Steven L. Schwarcz ). PART VIII The Federal Reserve, Monetary Policy, and the Financial Crisis. 56 Federal Reserve Policy and the Housing Bubble ( Lawrence H. White ). 57 The Greenspan and Bernanke Federal Reserve Role in the Financial Crisis ( John Ryan ). 58 The Risk Management Approach to Monetary Policy: Lessons from the Financial Crisis of 2007-2009 ( Marc D. Hayford and A.G. Malliaris ). 59 Reawakening the Inflationary Monster: U.S. Monetary Policy and the Federal Reserve ( Kevin Dowd and Martin Hutchinson ). 60 The Transformation of the Federal Reserve System Balance Sheet and its Implications ( Peter Stella ). PART IX Implications of the Crisis for Our Economic Systems. 61 Systemic Risk and Markets ( Steven L. Schwarcz ). 62 The Transmission of Liquidity Shocks During the Crisis: Ongoing Research into the Transmission of Liquidity Shock Suggests the Emergence of a Range of New Channels During the Credit Crisis ( Nathaniel Frank, Brenda Gonzalez-Hermosillo, and Heiko Hesse ). 63 Credit Contagion from Counterparty Risk ( Phillipe Jorion and Gaiyan Zhang ). PART X International Dimensions of the Financial Crisis. 64 Only in America? When Housing Boom Turns to Bust ( Luci Ellis ). 65 The Equity Risk Premium amid a Global Financial Crisis ( John R. Graham and Campbell R. Harvey ). 66 Australia's Experience in the Global Financial Crisis ( Christine Brown and Kevin Davis ). 67 Collapse of a Financial System: An Icelandic Saga ( Tryggvi Thor Herbertsson ). 68 Iceland's Banking Sector and the Political Economy of Crisis ( James A.H.S. Hine and Ian Ashman ). 69 The Subprime Crisis: Implications for Emerging Markets ( William B. Gwinner and Anthony B. Sanders ). PART XI Financial Solutions and Our Economic Future. 70 The Long-Term Cost of the Financial Crisis ( Murillo Campello, John R. Graham, and Campbell R. Harvey ). 71 Coping with the Financial Crisis: Illiquidity and the Role of Government Intervention ( Bastian Breitenfellner and Niklas Wagner ). 72 Fiscal Policy for the Crisis ( Antonio Spilimbergo, Steve Symansky, Olivier Blanchard, and Carlo Cottarelli ). 73 The Future of Securitization ( Steven L. Schwarcz ). 74 Modification of Mortgages in Bankruptcy ( Adam J. Levitin ). 75 The Shadow Bankruptcy System ( Jonathan C. Lipson ). 76 Reregulating Fannie Mae and Freddie Mac ( Dwight M. Jaffee ). 77 Would Greater Regulation of Hedge Funds Reduce Systemic Risk? ( Michael R. King and Philipp Maier ). 78 Regulating Credit Default Swaps ( Houman B. Shadab ). Index.