Collapse. The story of the international financial crisis, its causes and policy consequences

This paper is the story of success and failure in the financial markets, the markets for goods and services and in politics. It is a difficult story to tell because the crisis had many causes, but the focus here is on three main factors. First, the incentives that contributed to a credit-fuelled bubble, especially in property markets. Monetary and regulatory policies feature prominently in this part of the story. Second, because the housing bubble alone cannot explain the magnitude of the subsequent events, gearing in the financial sector, which affected asset markets unrelated to sub-prime mortgages will be examined. These developments are explained by reference to private financial sector decisions, including the role of the shadow-banking sector, and their regulatory backdrop. Finally, an answer will be sought to the question of how highly geared banks first became fragile and then failed with such dire consequences for the economy that massive policy intervention had become essential. The consequences of these large policy interventions and the international tensions caused by them are also explored.

G01, G20, G28, E58

Financial crisis, Banks, Financial regulation, Monetary policy, Fiscal policy, Currency wars