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

Gerard Caprio, Asli Demirguc-Kunt and Edward Kane

No 2008-03, Center for Development Economics 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)
Pages: 60 pages
Date: 2008-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Published in World Bank Research Observer, February 2010, v. 25, iss. 1, pp. 125-55.

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Related works:
Journal Article: The 2007 Meltdown in Structured Securitization: Searching for Lessons, not Scapegoats (2010)
Working Paper: The 2007 meltdown in structured securitization: searching for lessons, not scapegoats (2008)
Working Paper: The 2007 Meltdown in Structured Securitization: Searching for Lessons not Scapegoats (2008)
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