The 2007 Meltdown in Structured Securitization: Searching for Lessons not Scapegoats

Gerard Caprio (), Asli Demirguc-Kunt and Edward Kane
Additional contact information
Edward Kane: Boston College and NBER

No 2008-08, Department of Economics Working Papers from Department of Economics, Williams College

Abstract: The intensity of recent turbulence in financial markets has surprised nearly everyone. This paper searches out the root causes of the crisis, distinguishing them from scapegoating explanations that have been used in policy circles to divert attention from the underlying breakdown of incentives. Incentive conflicts explain how securitization went wrong, why credit ratings proved so inaccurate, and why it is superficial to blame the crisis on mark-to-market accounting, an unexpected loss of liquidity or trends in globalization and deregulation in financial markets. Our analysis finds disturbing implications of the crisis for Basel II and its implementation. We argue that the principal source of financial instability lies in contradictory political and bureaucratic incentives that undermine the effectiveness of financial regulation and supervision in every country in the world. We conclude the paper by identifying reforms that would improve incentives by increasing transparency and accountability in government and industry alike.

Keywords: Financial crisis; Securitization; Regulation and Supervision; Safety Nets (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 (search for similar items in EconPapers)

Downloads: (external link)
http://www.williams.edu/Economics/wp/caprioCDK.pdf Full text (application/pdf)

Related works:
Working Paper: The 2007 meltdown in structured securitization: searching for lessons, not scapegoats (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:wil:wileco:2008-08

Ordering information: This working paper can be ordered from

The price is Free.

Access Statistics for this paper

More papers in Department of Economics Working Papers from Department of Economics, Williams College
Address: Williamstown, MA 01267
Contact information at EDIRC.
Series data maintained by Stephen Sheppard ().