IDEAS home Printed from https://ideas.repec.org/p/pil/wpaper/46.html
   My bibliography  Save this paper

Moral hazard and the financial crisis of 2007-9: An Explanation for why the subprime mortgage defaults and the housing market collapse produced a financial crisis that was more severe than any previous crashes (with exception of the Great Depression of 1929)

Author

Listed:
  • Ronald Jean Degen

    (International School of Management Paris)

Abstract

This paper examines the financial crisis in 2007-9 that was more severe than previous crashes, including the dot-com crash of 2001 and the market crash of 1987 (with the exception of the Great Depression of 1929). This severity was due to excessively risky speculative bets taken by the executives of financial institutions. When the ?housing bubble? burst, these speculative bets, which were based on the U.S. housing market and the subprime mortgages, triggered the financial systemic failures of the U.S. in June 2007 (the subprime mortgage crisis) and September 2008 (the shadow-banking crisis). The systemic financial failure of September 2008 (the shadow-banking crisis) was greatly amplified by excessively risky speculations and this led to a rapid deterioration of the entire global economy. This paper examines the potential for moral hazard in the financial system leading up to this crisis, and attempts to determine if this was a motivating factor in these risky bets.

Suggested Citation

  • Ronald Jean Degen, 2009. "Moral hazard and the financial crisis of 2007-9: An Explanation for why the subprime mortgage defaults and the housing market collapse produced a financial crisis that was more severe than any previou," Working Papers 46, globADVANTAGE, Polytechnic Institute of Leiria.
    • Handle: RePEc:pil:wpaper:46
    as

    Download full text from publisher

    File URL: https://globadvantage.ipleiria.pt/files/2009/10/working_paper-46_globadvantage.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. G. M.P. Swann, 2009. "The Economics of Innovation," Books, Edward Elgar Publishing, number 13211.
    2. George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Costa Cabral, Nazare, 2010. "Breve guia temático e bibliográfico sobre o estudo da actual crise financeira e económica [Short thematic guide to the study of current financial and economic crisis]," MPRA Paper 20743, University Library of Munich, Germany.
    2. Ronald Degen, 2014. "How graduate business schools professors can assist in reducing today's lack of ethics in business," Working Papers 109, globADVANTAGE, Polytechnic Institute of Leiria.
    3. Ronald Jean Degen, 2013. "How career counseling, management coaching, and mentoring can assist in reducing today's lack of ethics in business," Working Papers 105, globADVANTAGE, Polytechnic Institute of Leiria.
    4. Dilyana Dimova, 2012. "The Role of Consumer Leverage in Generating Financial Crises," Economics Series Working Papers 631, University of Oxford, Department of Economics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yochanan Shachmurove, 2012. "Failing Institutions Are at the Core of the U.S. Financial Crisis," PIER Working Paper Archive 12-040, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    2. Foster, John & Metcalfe, J. Stan, 2012. "Economic emergence: An evolutionary economic perspective," Journal of Economic Behavior & Organization, Elsevier, vol. 82(2), pages 420-432.
    3. Marcin, Piatkowski, 2009. "The Coming Golden Age of New Europe," MPRA Paper 19523, University Library of Munich, Germany.
    4. Frank R. Lichtenberg, 2014. "Has Medical Innovation Reduced Cancer Mortality?," CESifo Economic Studies, CESifo Group, vol. 60(1), pages 135-177.
    5. Francesco Bogliacino & Mario Pianta, 2016. "The Pavitt Taxonomy, revisited: patterns of innovation in manufacturing and services," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 33(2), pages 153-180, August.
    6. Stern, Nicholas, 2018. "Public economics as if time matters: Climate change and the dynamics of policy," Journal of Public Economics, Elsevier, vol. 162(C), pages 4-17.
    7. Jang, Tae-Seok & Sacht, Stephen, 2017. "Modeling consumer confidence and its role for expectation formation: A horse race," Economics Working Papers 2017-04, Christian-Albrechts-University of Kiel, Department of Economics.
    8. Cowling, Marc & Ughetto, Elisa & Lee, Neil, 2018. "The innovation debt penalty: Cost of debt, loan default, and the effects of a public loan guarantee on high-tech firms," Technological Forecasting and Social Change, Elsevier, vol. 127(C), pages 166-176.
    9. Alhassan Abdul-Wakeel Karakara & Evans Osabuohien, 2020. "ICT adoption, competition and innovation of informal firms in West Africa: a comparative study of Ghana and Nigeria," Journal of Enterprising Communities: People and Places in the Global Economy, Emerald Group Publishing Limited, vol. 14(3), pages 397-414, June.
    10. Bharat Diwakar & Gilad Sorek, 2016. "Dynamics of Human Capital Accumulation, IPR Policy, and Growth," Auburn Economics Working Paper Series auwp2016-11, Department of Economics, Auburn University.
    11. Dana Benešová & Miroslav Hušek, 2019. "Factors for efficient use of information and communication technologies influencing sustainable position of service enterprises in Slovakia," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 6(3), pages 1182-1194, March.
    12. Marina Rybalka, 2015. "The innovative input mix. Assessing the importance of R&D and ICT investments for firm performance in manufacturing and services," Discussion Papers 801, Statistics Norway, Research Department.
    13. ManYing Kang & Marcel Ausloos, 2017. "An Inverse Problem Study: Credit Risk Ratings as a Determinant of Corporate Governance and Capital Structure in Emerging Markets: Evidence from Chinese Listed Companies," Economies, MDPI, vol. 5(4), pages 1-23, November.
    14. Xuebing Tang, 2012. "The Assessment on Environmental Value of Thermal Power in China," Business and Management Research, Business and Management Research, Sciedu Press, vol. 1(1), pages 115-120, March.
    15. Vitaliy Roud & Thomas Wolfgang Thurner, 2018. "The Influence of State‐Ownership on Eco‐Innovations in Russian Manufacturing Firms," Journal of Industrial Ecology, Yale University, vol. 22(5), pages 1213-1227, October.
    16. Galasso, Alberto & Schankerman, Mark, 2013. "Patents and Cumulative Innovation:Causal Evidence from the Courts," IIR Working Paper 13-16, Institute of Innovation Research, Hitotsubashi University.
    17. Jos� Lobo & Charlotta Mellander & Kevin Stolarick & Deborah Strumsky, 2014. "The Inventive, the Educated and the Creative: How Do They Affect Metropolitan Productivity?," Industry and Innovation, Taylor & Francis Journals, vol. 21(2), pages 155-177, February.
    18. Laura Barbieri & Daniela Bragoli & Flavia Cortelezzi & Giovanni Marseguerra, 2015. "Public Support to Innovation Strategies," DISCE - Quaderni del Dipartimento di Scienze Economiche e Sociali dises1509, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    19. Chin Hee Hahn & Dionisius Narjoko & Heiwai Tang & Yifan Zhang & Tomohiko Inui & Keiko Ito & Keishi Shoji & Nguyen Dinh Chuc & Nguyen Ngoc Anh & Li Hai Anh & Nguyen Thi Phuong Mai & Sadayuki Takii & Di, 2011. "Dynamics of Firm Selection Process in Globalized Economies," Books, Economic Research Institute for ASEAN and East Asia (ERIA), number 2011-RPR-03 edited by Chin Hee Hahn & Dionisius Narjoko, January.
    20. Guglielmo Maria Caporale & Alex Plastun, 2019. "Price overreactions in the cryptocurrency market," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 46(5), pages 1137-1155, August.

    More about this item

    Keywords

    moral hazard; financial crisis of 2007-9; burst of the housing bubble; subprime mortgages crisis; shadow-banking crisis;
    All these keywords.

    JEL classification:

    • L0 - Industrial Organization - - General
    • M0 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - General
    • M1 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pil:wpaper:46. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Nuno Reis (email available below). General contact details of provider: https://edirc.repec.org/data/deiplpt.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.