Lessons From The Crisis

Friday, December 7, 2018
Image credit: 
istock

CLICK HERE TO DOWNLOAD THE PAPER
CLICK HERE TO DOWNLOAD THE PRESENTATION

In the years leading up to the financial crisis that began in 2007, the core of the financial system was vulnerable to major shocks emanating from any of a variety of sources. While this particular crisis was triggered by over - levered home owners and a severe downturn in U.S . housing markets (Mian and Sufi , 2015), a reasonably well supervised financial system would have been much more resilient to this and other types of severe shocks .

Instead, the core of the financial system was a key channel of propagation and magnification of losses suffered in the housing market (Aikman, Bridges, Kashyap, and Siegert, 2018) . Critical financial intermediaries failed, or were bailed out, or dramatically reduced their provision of liquidity and credit to the economy. In the deepest stage of the crisis, as shown by Bernanke (2018), the failure of Lehman Brothers was accompanied by large, sudden, and widespread increases in the cost of cred it to the economy and significant adverse impacts on real aggregate variables.

The core financial system ceased to perform its intended functions for the real economy at a reasonable level of effectiveness . The impact of the housing - market shock on the rest of the economy was correspondingly much larger than necessary.