The Ethical and Socio-Political Dimensions of the Financial Crisis of 2007–2008 and the Subsequent Recession

Wilfried Ver Eecke ()
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Wilfried Ver Eecke: Georgetown University

Chapter Chapter 5 in Ethical Reflections on the Financial Crisis 2007/2008, 2013, pp 83-100 from Springer

Abstract: Abstract In this chapter I make use of the publications of Reinhart and Rogoff, Reich and Rajan to understand the causes of the financial crisis of 2007–2008 and the ensuing recession. Reich and Rajan go beyond a purely economic analysis and introduce socio-political factors such as the income gap between the very rich and the rest of society in the decade before the crisis, the lack of regulations of the financial sector, the use of easy mortgages to keep the American dream alive, and the fraudulent treatment of some mortgages and the derivatives based on them. These socio-political factors touch upon ethical problems. The ethical dimension in economic thinking has been captured by Musgrave’s concept of merit goods. Reich and Rajan make use of seven of my eleven categories of merit goods to explain both the financial crisis of 2007–2008 and the characteristics of the ensuing recession. I end the chapter by showing that the American political system is currently not capable of delivering the merit good decisions required for dealing in a reasonable way with the challenges that led to the financial crisis and the recession caused by it.

Keywords: Financial crisis; Income gap; Socio-political factors; American dream; Regulations; Recession; Business cycle; Capitalism; Merit goods; Public goods; Debt; Education; Safety net; Health insurance; Tail risk; Unemployment; Cheap money; Ethical (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:spr:spbchp:978-3-642-35091-7_5

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DOI: 10.1007/978-3-642-35091-7_5

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