The Academic Analysis of the 2008 Financial

Topics: Subprime mortgage crisis, Financial crisis, Financial crisis of 2007–2010 Pages: 10 (3989 words) Published: June 24, 2013
The Academic Analysis of the 2008 Financial Crisis: Round 1
1. Matthew Spiegel
+ Author Affiliations
1. Yale School of Management
1. Send correspondence to Matthew Spiegel, Yale School of Management, P.O. Box 208200, New Haven, CT 06880-8200, telephone: 203-432-6017, email:  
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Academics responded to the challenges posed by the 2008 financial crisis with a flurry of studies. This collection of articles is just the academic community's first look into it. The articles begin with an examination at the last national housing price crash: the great depression of the 1930s. This is followed by articles looking at the current mortgage market and how it behaved. Did modern innovations reflect or add to the downturn? The next set of papers examines how non-financial firms were impacted by the crash. To what degree did credit worthy firms nevertheless find themselves without access to capital? The papers then end with a look into how the banking sector itself fared throughout this period. JEL

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In 2008 the financial markets froze. Firms suddenly discovered that they could no longer roll over their corporate paper, a normally very liquid and easy-to-issue security. Banks stopped lending to each other in fear they would never be paid back. Government officials asked Congress for both the authority and funds to fill in for the now absent credit markets. Congress complied, and thus was born the Troubled Asset Relief Program (TARP), an institution that lives on over two years later. What caused the markets to freeze? How was the non-financial sector affected? Did government actions help? What can or should be done in the event another, similar crisis hits? Can anything be done to avert the chance that we see another? Academics responded to the challenges posed by the 2008 financial crisis with a flurry of studies. Seeing that, it was decided to create a special issue of the Review of Financial Studies with the help of a conference held at the Yale School of Management in July 2009. Of course, this is just the academic community's first look into the crisis and what can be done in the future. Undoubtedly, many articles will follow. Previous SectionNext Section

1. The Great Depression
Those who cannot remember the past are condemned to repeat it. (Santayana 1905, p. 284)
While it is always tempting to believe that current events are unique, 2008 was not the first time the world economy saw a serious decline. The Great Depression of the 1930s also impacted nearly every developed economy in the world. Are there lessons from that episode that we can apply today? Perhaps, and one advantage of studying that period is that the years have let us see how various policies ultimately played out. Fishback et al. (2011) open this issue with an analysis of the government-run Home Owners' Loan Corporation (HOLC). At the time this was a major program designed to prop up housing prices. With the advent of the Great Depression, housing prices began their slide and would eventually fall to about a third of their initial value. As one might expect, this led to a wave of foreclosures. Bank failures would follow as properties worth far less than the underlying mortgages were seized. The government, wishing to avert all of this, provided funding to the HOLC so that it could purchase delinquent loans, refinance them, and thus give homeowners a chance to remain in their dwellings. How well did the HOLC work? Fishback et al. (2011) conclude that in rural areas with limited banking facilities it may have helped some. Their evidence indicates that in these areas, and these areas alone, the HOLC may have propped up property values by 15% per dollar spent. Overall, the program purchased about a million loans...
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