According to the Economist, Charles Morris is the first to really assess the current crisis of the financial market in his book The Trillion Dollar Meltdown:
He describes three trends converging to create the bubble: By 2006 the growing trend towards deregulation had pushed three-quarters of all lending outside the purview of regulators. Securitisation created a serious agency problem, leaving loan originators, who were paid up-front, with no incentive to avoid bad credits and every reason to piggyback inappropriate products onto good ones [...] Banks and rating agencies were gripped by the pretence that all finance can be calculated by risk-modelling eggheads. It did not help that many investors blindly accepted the rating agencies as a kind of "financial Supreme Court".
In addition, the "Federal Reserve fuelled the housing boom by sharply cutting the cost of short-term money. Mr Greenspan ignored warnings about subprime excess, while eagerly championing 'new paradigms', from hybrid mortgages to credit derivatives." As for the solution:
He offers a raft of suggestions: originators should retain the riskiest portion of securitised loans; prime brokers should stop lending to hedge funds that fail to disclose their balance sheets; trading of credit derivatives should be brought onto exchanges for the sake of safety, even if this raises costs; and some version of the old Glass-Steagall act, which separated commercial banking and capital-markets activities, should be re-introduced. Ultimately, he argues, after a quarter-century of "market dogmatism" it is time for the regulatory pendulum to swing the other way.
Sonja Bonin is co-editor of the Atlantic Review and a freelance journalist and translator based in Switzerland.
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