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

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

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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 (

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  • 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

  • The Initial Problem: Subprime Mortgage Lending

  • Subprime Mortgage Lending: Boom and Bust

  • From Housing Crisis to Financial Crisis

  • Case Study: Northern Rock (UK)

  • Northern Rock’s Collapse

  • After Northern Rock, 2008-2009

  • …the Financial Losses Mount…

  • …and the Real Economic Impact is Severe

  • Policy Responses to Financial Crises: Two Phases

  • Short-Term Policy Responses: Crisis Management

  • Short-Term Policies: Key Questions

  • How to Choose Policies? Difficult Tradeoffs

  • Thus Far: Global Crisis, National Responses

  • The Global Reform Agenda: Consensus on Broad Goals…

  • …But Not on Specific Policies & Institutions

  • Why No Agreement? Difficult Tradeoffs

  • Tradeoffs: The Primacy of Politics

  • Example: Reforming the IMF

  • The Next Stage: Are the Bailouts Working?

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