From the Real-World Economics Review Blog, a timeline of warnings and events going back to 1995 and leading up to the financial crisis of the last few years. Some early warnings from various economists: Sept, 2001 “the new housing boom is another rapidly inflating asset bubble financed by the same loose money practices that fuelled [...]

A new paper that will be published in the Journal of Investment Management posits the theory that economists suffer from “physics envy,” aspiring to create economic models “as predictive as those in physics. While this perspective has led to a number of important breakthroughs in economics,” says the abstract, “‘physics envy’ has also created a [...]

Tip o’ the hat to Laura at EconomyStory for sending us Sub-prime the Musical. The site consists of a series of podcasts by a college student named Madison Koshy, who created them from research she did on the causes of the credit crisis. Naturally, she then wrote song parodies to illustrate the concepts she had [...]

“…there is every reason to believe the biggest banks are hiding huge losses on second liens….Another financial crisis is nearly certain to hit in coming months. The belief that together Geithner and Bernanke have resolved the crisis and that they have put the economy on a path to recovery will be exposed as wishful thinking.” [...]

Ever hear “Intelligence Squared“? Rethink your point of view with Intelligence Squared U.S., a live debate series in New York City. Intelligence Squared U.S. is a public charity supported by individuals and foundations who share our mission of raising the level of public discourse on the most critical issues of the day. Launched in 2006, [...]

“Recent trends in credit default swap markets show a clearly discernable uptick in the perceived likelihood of default on 5-year U.S. senior Treasury debt, a notion that was virtually unthinkable in the past.” Cited in today’s front page New York Times article on the inability of government to address the mounting national debt is research [...]

Last year in The American Spectator, Peter J. Wallison wrote about the political importance of determining causes of the financial crisis that blew up in 2008.

Two narratives seem to be forming to describe the underlying causes of the financial crisis. One, as outlined in a New York Times front-page story on Sunday, December 21, is that President Bush excessively promoted growth in home ownership without sufficiently regulating the banks and other mortgage lenders that made the bad loans. The result was a banking system suffused with junk mortgages, the continuing losses on which are dragging down the banks and the economy. The other narrative is that government policy over many years–particularly the use of the Community Reinvestment Act and Fannie Mae and Freddie Mac to distort the housing credit system– underlies the current crisis. The stakes in the competing narratives are high. The diagnosis determines the prescription. If the Times diagnosis prevails, the prescription is more regulation of the financial system; if instead government policy is to blame, the prescription is to terminate those government policies that distort mortgage lending.

Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program (that’s SIGTARP to you) has released his Quarterly Report to Congress, which you can read here in .pdf. The opening section of the Executive Summary is below. My own executive summary:

• The financial system is far more stable in parts than at the height of the crisis in fall, 2008. Banks can raise funds and many formerly on the verge of collapse have repaid the emergency government loans early. These repayments have resulted in a profit for the U.S. Treasury on some of the TARP investments, decreasing the cost of the bailout to taxpayers.
• The TARP goal of increasing financing to U.S. businesses and consumers has not been met, as lending continues to decrease and home foreclosures remain at record levels. The repayment of government funds by banks and the exit of the U.S. as a major shareholder in the banks have signficantly decreased the government’s ability to influence the policies of these financial institutions.
• Fundamental problems in the financial system have not been addressed to date, and “too big to fail” institutions are even larger, thanks in part to TARP and other bailout programs. Incentives to take reckless risk are even greater, as the market is convinced government will step in to cover losses that could threaten the system. Executive compensation also remains an incentive to take inordinate risks.
• The government’s efforts to support home prices risk re-inflating a housing bubble.

Just how did mortgage-backed investments that were rated AAA by the ratings agencies Moody’s, Standard & Poor’s, and Fitch, wind up as “toxic assets” that precipitated a financial crisis that nearly brought down the world economic system last year and fed straight into this vicious recession? After all, investors depend on the agencies to assess [...]