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Subprime assets and financial crisis: theory, policy and the law

Author

Listed:
  • Marcus Miller

    (University of Warwick)

  • Lei Zhang

    (Songklod Rastapana)

  • Songklod Rastapana

    (University of Warwick)

Abstract

In this paper, we explore three specific aspects of the US subprime crisis, using both theoretical models and the outcome of subsequent legal proceedings. First, the role of pecuniary externalities in amplifying shocks to the quality of MBS held by Investment Banks. Second, the role of adverse selection in the marketing of such assets by Investment Banks; and third the role of financial panic in making shadow banking disaster prone. The relevance of these differing perspectives is attested by the nature of state support and, more especially, the findings of law courts. Janet Yellen has recently argued that the vulnerabilities within the US financial system in the mid-2000s were “numerous and familiar from past financial panics”. That the aforementioned threats to stability should be complements and not substitutes is of more than technical interest. It helps to show why the US financial system was so exposed to radical failure.Keywords: Financial Instability, Pecuniary Externalities, Asymmetric Information, Bank run JEL Classification: D52, D53, G01, G12, G13

Suggested Citation

  • Marcus Miller & Lei Zhang & Songklod Rastapana, 2017. "Subprime assets and financial crisis: theory, policy and the law," CAGE Online Working Paper Series 340, Competitive Advantage in the Global Economy (CAGE).
    • Handle: RePEc:cge:wacage:340
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    File URL: https://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/manage/publications/340-2017_miller.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    financial instability; pecuniary externalities; asymmetric information; bank run jel classification: d52; d53; g01; g12; g13;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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