lessons from the 2007 financial crisis - united nations.pdfVIP

Lessons from the 2007 financial crisis∗∗ ∗∗ Willem H. Buiter** Professor of European Political Economy European Institute London School of Economics and Political Science, Universiteit van Amsterdam, CEPR and NBER 11 December 2007 ∗ Paper submitted to the UK Treasury Select Committee, as background for my appearance before the Committee on Tuesday, November 13, 2007. ** © Willem H. Buiter 2007. Abstract The paper studies the causes of the current financial crisis and considers proposals for its mitigation as well as for the prevention or mitigation of future crises. The crisis is the product of a ‘perfect storm’ bringing together a number of microeconomic and macroeconomic pathologies. Among the microeconomic systemic failures were: wanton securitisation, fundamental flaws in the rating agencies’ business model, the procyclical behaviour of leverage in much of the financial system and of the Basel capital adequacy requirements, privately rational but socially inefficient disintermediation, and competitive international de-regulation. Reduced incentives for collecting and disseminating information about counterparty risk were a pervasive feature of the new financial world of securitisation and off-balance sheet vehicles. So was lack of transparency about who owned what and about who owed what and to who. Proximate local drivers of the specific way in which these problems manifested themselves were regulatory and supervisory failure in the US home loan market. Among the macroeconom