The Global Financial (nee US Subprime Mortgage) Crisis - 12 Contemplations from 3 Perspectives

Abstract

This article is an informal, conversation-styled retrospective piece on the recent global financial (nee US subprime mortgage) crisis. In lieu of formally enumerating the root causes or reform recommendations, the article observes subtle patterns of crisis dynamics and presents these qualitative lessons as points of contemplation, tying this crisis episode with those in the past.

To this end, twelve contemplations are organised along three perspectives: from background macroeconomic factors down to the level of risk-magnifying financial products, from local bubble phenomena to systemic, global event, and from concerns over contemporary issues to the recognition that many issues are indeed timeless. Among others, the author emphasises the danger when institutional investors became desperate for yield enhancements, the irony that often it is the less exotic risk products that (by virtue of accessing much wider investor base than obviously toxic ones) carry the most systemic impact, the manner by which reputation underpins all forms of intermediary risks, the inter-generational futility of safeguarding against future crises, and the interpretation of central banking in terms of an optimal control problem.

Keywords: financial crisis, subprime mortgage, US housing bubbles, originate-to-distribute model, asset-backed commercial paper (ABCP), collateralized debt obligation (CDO), structured investment vehicle (SIV), lessons learned, regulatory reform, supervisory surveillance

JEL Classification: G21, G28