Moral hazard and the financial crisis of 2007-9: An Explanation for why the subprime mortgage defaults and the housing market collapse produced a financial crisis that was more severe than any previous crashes (with exception of the Great Depression of 1929)

Degen, Ronald

Moral hazard and the financial crisis of 2007-9: An Explanation for why the subprime mortgage defaults and the housing market collapse produced a financial crisis that was more severe than any previous crashes (with exception of the Great Depression of 1929)

No 46, Working Papers from globADVANTAGE, Polytechnic Institute of Leiria

Abstract: This paper examines the financial crisis in 2007-9 that was more severe than previous crashes, including the dot-com crash of 2001 and the market crash of 1987 (with the exception of the Great Depression of 1929). This severity was due to excessively risky speculative bets taken by the executives of financial institutions. When the ?housing bubble? burst, these speculative bets, which were based on the U.S. housing market and the subprime mortgages, triggered the financial systemic failures of the U.S. in June 2007 (the subprime mortgage crisis) and September 2008 (the shadow-banking crisis). The systemic financial failure of September 2008 (the shadow-banking crisis) was greatly amplified by excessively risky speculations and this led to a rapid deterioration of the entire global economy. This paper examines the potential for moral hazard in the financial system leading up to this crisis, and attempts to determine if this was a motivating factor in these risky bets.

Keywords: moral hazard; financial crisis of 2007-9; burst of the housing bubble; subprime mortgages crisis; shadow-banking crisis (search for similar items in EconPapers)
JEL-codes: L0 M0 M1 (search for similar items in EconPapers)
Date: 2009-10-01
New Economics Papers: this item is included in nep-pke and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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