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The Financial Crisis: Causes and Lessons

Citation

Publication Date: 
December 10, 2009
Format: 
Working Paper
Bibliography: Kenneth E. Scott, The Financial Crisis: Causes and Lessons, Rock Center for Corporate Governance at Stanford University Working Paper, No. 67 / Goethe University Institute for Law and Finance Working Paper, No. 108 (December 2009).

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A lot happened even before the perceived beginning of this crisis in 2007, so although the events are recent, I will review the period from 2001 to date, as part of our inquiry into the lessons to be learned. Much of it is probably familiar, but worth revisiting.

This necessarily simplified account is divided into 3 stages: First, a look at the key factors that led to the increasing riskiness of US home mortgages; second, how those risks were transmitted as securities from US housing lenders to institutional investors around the globe; and third, how those risks led to huge losses and created a credit crunch that moved the impact from the financial economy to the real economy. The goal is to lay a factual foundation for deriving the lessons that ought to be taken away from this very expensive experience.