The financial system played a leading role in the global economic crisis in the year of 2007. The list of possible explanations is long: deficient regulatory structures, conflicts of interest, economic deterioration of middle-income families, a wrong monetary policy, incorrect economic models and many more factors have been named. However, is it possible that in this discussion of the causes of the global financial crisis 2007 we are neglecting a more profound question? Is it possible that the GFC is evidence of the failure of a whole financial system? This essay will analyse if the GFC represents a systemic failure of market-based finance.
The thesis statement of this essay is that the GFC does not represent a systemic failure of market-based finance. To prove this I will first compare market-based finance and bank-based finance. Subsequently, the GFC will be explained. I will then give an overview on the effects of the GFC in market and bank-based financial systems. Next, I will discuss the relationship between market-based finance and the GFC. Finally, the resulting policy implications will be stated.
Table of Contents
1. Introduction
2. Comparison of market-based finance and bank-based finance
3. Explanation of the GFC
4. The Effects of the GFC in market-based systems and bank-based systems
5. The relationship between market and bank-based finance and the GFC
5. Policy Advice
6. Conclusion
Objectives & Research Themes
The primary objective of this study is to examine whether the Global Financial Crisis of 2007-09 serves as conclusive evidence of a systemic failure specifically within market-based financial systems. The research addresses the hypothesis that such a failure is not inherent to market-based models by analyzing comparative data and systemic interdependencies.
- Theoretical comparison of market-based versus bank-based financial architectures.
- Root causes and propagation mechanisms of the 2007-09 Global Financial Crisis (GFC).
- Comparative analysis of economic impacts (unemployment, GDP, individual income) across different financial systems.
- Critical evaluation of the role of credit rating agencies and monitoring failures.
- Formulation of policy implications regarding financial stability and systemic regulation.
Excerpt from the Book
3. Explanation of the GFC
The effects of the GFC were far-reaching: the damage was severe, both financial and human. The increase of the suicide rate in 2009 in Europe and America was higher than expected if earlier trends had continued (Chang et al. 2013). The GFC cost the U.S economy at least 40 to 90 percent of one year’s total goods and services (Atkinson et al. 2013, 19). The world GDP decreased from 2008 to 2009 about 5,19 % (World Bank 2018a).
The Federal Reserve (FED) lowered its funds rate from 5,24 % (July 2006) to 1,98% (May 2008) (FRED 2018a) to boost the economy. Accordingly, more US-citizens were able to raise a mortgage and did so. Banks accepted real estates as collateral because house prices increased since the beginning of the 1990’s (figure 1). Numerous mortgages were granted to people with small repayment ability. These were commonly referred to as subprime mortgages (Acharya and Richardson 2009, 196-198).
Banks securitised the mortgages which were rated. Securitised mortgages with different ratings were mixed together and bundled up in collateralised debt obligations (CDOs). Many of these CDOs which include a large variety of different mortgages were rated “AAA”.
Summary of Chapters
1. Introduction: The introduction presents the context of the 2007-09 financial crisis and posits the research question of whether this represents a systemic failure of market-based finance.
2. Comparison of market-based finance and bank-based finance: This chapter contrasts the mechanisms of resource allocation, corporate governance, and risk management between market-based and bank-based financial systems.
3. Explanation of the GFC: This section details the origins of the crisis, focusing on monetary policy, the housing bubble, subprime mortgages, and the role of securitization and rating agencies.
4. The Effects of the GFC in market-based systems and bank-based systems: An empirical overview comparing economic indicators such as unemployment, GDP per capita, and individual income in the USA, UK, Japan, and Germany during the crisis period.
5. The relationship between market and bank-based finance and the GFC: The author analyzes the correlation between financial architecture and crisis impact, arguing that monitoring failures were not exclusive to market-based systems.
5. Policy Advice: This chapter suggests that future stability lies in effective regulation and the reform of incentive structures for rating agencies rather than choosing between system models.
6. Conclusion: The study concludes that the GFC does not constitute a systemic failure of market-based finance and advocates for future academic focus on financial development levels rather than a binary system debate.
Keywords
Global Financial Crisis, Market-based finance, Bank-based finance, Subprime mortgages, CDOs, Corporate governance, Systemic risk, Financial regulation, Rating agencies, Monetary policy, Unemployment, GDP, Economic growth, Financial stability, Credit default risk.
Frequently Asked Questions
What is the core focus of this research paper?
The paper evaluates whether the Global Financial Crisis of 2007-09 serves as proof that market-based financial systems are fundamentally flawed or prone to systemic failure.
What are the central thematic fields addressed?
The themes include the structural differences between bank-based and market-based financial systems, the mechanics of the 2007-09 crisis, and the comparative economic impacts across different nations.
What is the primary thesis of the author?
The author argues that the GFC does not represent a systemic failure specific to market-based finance, suggesting that bank-based systems are equally susceptible to similar crises.
Which methodology is applied to compare the financial systems?
The study uses a comparative analysis of economic indicators—specifically unemployment rates, GDP per capita, and individual income—across four countries representing different financial models.
What is covered in the main body of the work?
The main body covers the theoretical comparison of financial systems, the detailed progression of the GFC from subprime mortgages to systemic institutional failure, and the policy implications for future regulation.
Which keywords best characterize the work?
Key terms include Global Financial Crisis, systemic risk, market-based versus bank-based systems, securitization, and credit rating agency reform.
How did the author evaluate the role of banks during the crisis?
The author argues that banks played a major role in spreading the crisis and that monitoring failures occurred in bank-based institutions as well, challenging the idea that banks provide superior oversight.
What is the author's suggestion regarding rating agencies?
The author concludes that the incentive system for rating agencies, which allows them to be paid by the principals they rate, is inherently flawed and suggests that nationalization may be a necessary step to ensure accountability.
Does the author favor one system over the other?
No, the author explicitly argues against choosing between the two systems, stating that stability is not a byproduct of the system type but rather of effective regulation and oversight.
- Quote paper
- David Höhl (Author), 2018, Was the crisis of 2007 a systemic failure of market-based finance?, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/465436
