The long-running Greek crisis and China’s recent stock market crash are the latest threats to the stability of the global financial system. But as this column explains, systemic risk is an inevitable part of any market-based economy. While we won’t eliminate systemic risk entirely, the agenda for researchers and policymakers should be to create a more resilient financial system that is less prone to disastrous crises and that still delivers benefits for the economy and for society.
Jon Danielsson, Jean-Pierre Zigrand, 07 August 2015
Charles Wyplosz, 12 September 2014
Last week, the ECB announced that it would begin purchasing securities backed by bank lending to households and firms. Whereas markets and the media have generally greeted this announcement with enthusiasm, this column identifies reasons for caution. Other central banks’ quantitative easing programmes have involved purchasing fixed amounts of securities according to a published schedule. In contrast, the ECB’s new policy is demand-driven, and will only be effective if it breaks the vicious circle of recession and negative credit growth.
Stuart A Gabriel, Matthew E. Kahn, Ryan K Vaughn, 05 May 2013
A relatively unforeseen implosion in housing markets figured prominently in the 2007 meltdown in capital markets and the subsequent downturn in the global economy. This column presents new research on the political geography of subprime lending. Congressional leaders – as well as other recipients of campaign contributions – may have benefited from gains to trade in the direction, pricing, and sizing of subprime mortgage loans.
Ing-Haw Cheng, Sahil Raina, Wei Xiong, 11 April 2013
The subprime crisis narrative focuses on incentives: ‘they knew it was risky, but didn’t care’. This column argues in favour of a more nuanced explanation, that distorted beliefs also mattered. An analysis of personal home transactions by mid-level managers in the mortgage-securitisation business shows that they increased their personal housing exposure during the boom. ‘Groupthink’ and distorted beliefs in the financial sector is something to take seriously if we want to prevent future crises.
Richard Wood, 19 December 2012
Five years after the subprime bubble burst, the self-correcting nature of business cycles is being questioned and, subsequently, orthodox macroeconomic policy is starting to be challenged. This column introduces a radical rethink of options open to macroeconomic policymakers, suggesting that in order to simultaneously achieve economic stimulus without increasing debt, new money creation should be used to directly finance on-going budget deficits.
Romain Rancière, Amine Ouazad, 16 March 2012
Did the rise in subprime mortgages – predominantly to black and Hispanic borrowers – lead to a fall in racial segregation as people were able to move to more desirable neighbourhoods? This column looks at extensive data on mortgages and changes in the ethnic mix at local schools. It finds that the credit boom that precipitated the global financial crisis may actually have increased racial segregation.
Amir Sufi, Atif Mian, 29 April 2010
US Congressional committees are now grilling bankers on the complex instruments that provided subprime mortgages with a veil of security. This column presents new evidence that subprime mortgages had more serious consequences – they were a key factor in the US housing-price boom. When house prices faltered, subprime mortgage holders defaulted en masse, eventually leading to the global crisis.
Javier Suarez, Enrico Perotti, 07 November 2009
Liquidity risk charges were proposed in February 2009 as a new macro-prudential tool to discourage systemic risk creation by banks. CEPR Policy Insight No. 40 refines this proposal in order to clarify challenging issues surrounding the implementation of liquidity risk charges.
Enrico Perotti, Javier Suarez, 27 February 2009
In this new Policy Insight Enrico Perotti and Javier Suarez explain how a liquidity and capital insurance arrangement could provide emergency liquidity (and perhaps capital) and protect the economy against systemic crisis.
Enrico Perotti, Javier Suarez, 27 February 2009
Correlated liquidity risks caused subprime mortgage problems to spread widely and sow panic that led to the credit crisis. This column proposes a mandatory liquidity charge to insure against collective bank runs in the future. It argues for charges proportional to securities’ maturity mismatches so as to discourage practices that create systemic risk.
Carmen M Reinhart, 07 July 2008
Carmen Reinhart talks to Romesh Vaitilingam about Vox's first book, which brings together key columns on subprime and the continuing turmoil in financial markets. She recalls Charles Kindleberger, who characterised financial crises as 'a hardy perennial'.
Daniel Cohen, 03 June 2008
What easy money brought forth in the new century, tight credit will take away in the years to come. Here one of France’s leading economists explains the origins of the subprime crisis and why it is likely to continue to unfold.
Luigi Spaventa, 08 May 2008
The global financial system may be caught in a downward spiral as market and funding illiquidity reinforce each other. The author of CEPR Policy Insight 22 presents a radical proposal that would break the feedback loop by not valuing illiquid assets at market prices under crisis conditions.
Avinash Persaud, 01 May 2008
Financial regulation never works the way it should. Here one of the world’s most experienced analysts of the global financial system presents some remarkably clear thinking on why we should not just do more of the same. An alternative model for policy action is proposed.
Dennis J Snower, 30 April 2008
The financial turmoil has been worsening as lagged adjustment processes play out. This column outlines economic dangers that may arise as they unwind, including a scenario in which the United States suffers extended stagflation.
Carmen M Reinhart, 05 May 2010
This column, first posted 19 April 2008, argues that sovereign debt crises have historically followed financial crises. Although data covering only the last thirty years might have given few hints about Greece's current problems, the Reinhart-Rogoff database spanning eight centuries reveals that today's event are very much in line with historical experience.
Giovanni Dell'Ariccia, Luc Laeven, Deniz Igan, 04 February 2008
Recent US mortgage market troubles unsteadied the global economy. This column summarises research analysing millions of loan applications to investigate the roots of the crisis. A credit boom may be to blame.
Stephen Cecchetti, 03 December 2007
The final essay examines whether central bank actions have created moral hazard, encouraging asset managers to take on more risk than is in society’s interest; the answer is “no”.
Stephen Cecchetti, 30 November 2007
The third essay in this 4-part series argues that central banks should have a direct role in financial supervision.
Stephen Cecchetti, 28 November 2007
The second essay in this 4-part series discusses the lesson from the Bank of England’s recent experience, arguing that a lender of last resort is no substitute for a well-designed deposit insurance mechanism.