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An Analysis of the Financial Crisis of 2008: Causes and Solutions

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An Analysis of the Financial Crisis of 2008: Causes and Solutions
An Analysis of the Financial Crisis of 2008: Causes and Solutions

By Austin Murphy*

________________________________________________________________________
*by Austin Murphy, Professor of Finance, Oakland University, SBA, Rochester, MI
48309-4493 (248-370-2125; jamurphy@oakland.edu).

Electronic copy available at: http://ssrn.com/abstract=1295344

Abstract
This research evaluates the fundamental causes of the current financial crisis. Close financial analysis indicates that theoretical modeling based on unrealistic assumptions led to serious problems in mispricing in the massive unregulated market for credit default swaps that exploded upon catalytic rises in residential mortgage defaults. Recent academic research implies solutions to the crisis that are appraised to be far less costly than a bailout of investors who made poor financial decisions with respect to credit analysis. JEL: G11, G12, G13, G14

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Electronic copy available at: http://ssrn.com/abstract=1295344

An Analysis of the Financial Crisis of 2008: Causes and Solutions

The financial crisis in 2008 is of such epic proportions that even astronomical amounts spent to address the problem have so far been insufficient to resolve the it.
Besides the well-publicized $700 billion approved by Congress, the Federal Reserve has attempted to bail out institutions and markets with about $1.3 trillion in investments in various risky assets, including loans to otherwise bankrupt institutions and collateralized debt obligations like those backed by subprime mortgages that are defaulting at rapid rates (Morris, 2008). A further $900 billion is being proposed in lending to large corporations (Aversa, 2008), making a total of nearly $3 trillion in bailout money so far, without even counting the massive sum of corporate debts guaranteed by the U.S. government in the last year. An analysis of the fundamental causes of this “colossal failure” that has put “the entire financial


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