The Conventional Views of the Global Crisis: A Critical Assessment

Emiliano Brancaccio and Giuseppe Fontana

Chapter 3 in The Financial Crisis, 2011, pp 39-62 from Palgrave Macmillan

Abstract: Abstract Since the summer of 2007, the world has faced — and will continue toface at least for the next few years — what in retrospect is likely to be judged the most virulent global financial crisis ever recorded together with a recession, which seems comparable to the Great Depression of 1929 (Eichengreen and O’Rourke 2009). Among the conventional interpretations of the current crisis which can be found in the growing literature on the nature and cause of the crisis, much attention has been paid to the following two. First, it is argued that the crisis is due to the misguided under-pricing of risk: financial investors ‘played with fire’ by being overconfident about the ability of their mathematical models of measuring and managing risk. Secondly, it is argued that the cause of the crisis is the loose monetary policy of the early 2000s, what has also been labelled the ’Greenspan put’: central banks — and in particular the Fed — came to the rescue of financial markets by lowering the short-run interest rate significantly and on a consistent basis. This chapter assesses the merits and drawbacks of these two conventional causes, looking at the peculiar type of relationship between these explanations and their theoretical frame of reference, namely the New Consensus Macroeconomics (NCM) model. The structure of the chapter is as follows. Section 2 presents a brief chronology of the financial crisis, with a particular focus on the key stages of the crisis.

Keywords: Monetary Policy; Financial Crisis; Credit Default Swap; Taylor Rule; Bond Default (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-30394-2_3

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DOI: 10.1057/9780230303942_3

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