The crisis, Fed, Quants and stochastic optimal control

Jerome Stein

Economic Modelling, 2011, vol. 28, issue 1, 272-280

Abstract: The Dodd–Frank (D–F) Financial Reform Bill authorizes the Federal Reserve to monitor the financial services marketplace to identify potential threats to the stability of the US financial system. Alan Greenspan's retrospective indicates what he has learned from the crisis. He argues that the crisis, the housing price bubble, was unpredictable and unavoidable. Greenspan now focuses on desirable capital requirements, or leverage, for banks and financial intermediaries. I explain why the Fed's and Greenspan's views stem from a lack of the appropriate tools of analysis of what is an excessive debt or leverage. The Quants who devised the highly leveraged financial derivatives ignored systemic risk.

Keywords: Dodd–Frank reform bill; Greenspan; Capital requirements; Stochastic optimal control; Warning signals of crisis; Optimal leverage and debt ratios; Bubbles; Dodd–Frank bill (search for similar items in EconPapers)
JEL-codes: C61 G11 G12 G14 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:28:y:2011:i:1:p:272-280

DOI: 10.1016/j.econmod.2010.09.002

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