In search of stability the economics and politics of the global financial crisis

In Search of Stability: The Economics and Politics of the Global Financial Crisis Mark Copelovitch Assistant Professor of Political Science & Public Affairs University of Wisconsin – Madison March 16, 2009 Overview The economics of the crisis • Causes • Timeline • Effects The politics of financial stability • Policy responses • Difficult tradeoffs • The road ahead What Went Wrong? Three Faulty Assumptions About 21st Century Finance Securitization • Capital markets are so advanced that banks can lend more aggressively while off-loading risk through debt securities Credit agencies • Credit ratings agencies offer an easy and cheap “compass” for investors to assess the risk of these complex securities Risk and financial stability • The “slicing and dicing” of risk has made the financial system more stable and less crisis-prone The Initial Problem: Subprime Mortgage Lending SOURCE: BBC Subprime Borrowers “Subprime” borrowers • Borrowers with “bad” credit (