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Too Much Right Can Make a Wrong: Setting the Stage for the US Financial Crisis

In: Financial Institutions and Markets

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  • Richard J. Rosen

    (Federal Reserve Bank of Chicago)

Abstract

The financial crisis that started in 2007 exposed a number of flaws in the financial system. Many of these flaws were associated with financial instruments that were issued by the shadow banking system, especially securitized assets. The volume and complexity of securitized assets grew rapidly during the run-up to the financial crisis that began in 2007. This chapter discusses how the financial crisis can be viewed as a possible but logical outcome of a system where investors are overconfident, busy, and investing other peoples’ money and intermediaries are set up to take advantage of investors’ tendencies. The investor-intermediary risk cycle in this crisis is common to other crises. However, there are a number of factors that may have made the 2007 crisis more severe. Among them are the length of the precrisis period, the shift from financial intermediaries to the shadow banking system, the increasing interconnectedness among financial firms, and the increased leverage at some financial firms.

Suggested Citation

  • Richard J. Rosen, 2010. "Too Much Right Can Make a Wrong: Setting the Stage for the US Financial Crisis," Palgrave Macmillan Books, in: Robert R. Bliss & George G. Kaufman (ed.), Financial Institutions and Markets, chapter 2, pages 37-69, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-11736-5_2
    DOI: 10.1057/9780230117365_2
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    Cited by:

    1. Nofsinger, John R., 2012. "Household behavior and boom/bust cycles," Journal of Financial Stability, Elsevier, vol. 8(3), pages 161-173.
    2. Si, Deng-Kui & Li, Xiao-Lin, 2022. "Shadow banking business and firm risk-taking: Evidence from China," Research in International Business and Finance, Elsevier, vol. 62(C).
    3. Marina Khmelnitskaya, 2014. "Russian housing finance policy: state-led institutional evolution," Post-Communist Economies, Taylor & Francis Journals, vol. 26(2), pages 149-175, June.

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