By Wolfgang Munchau

Good written. effortless to learn and comprehend rationalization of the global occasions chargeable for the present monetary downturn. constrained rules for ideas.

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Extra resources for The Meltdown Years: The Unfolding of the Global Economic Crisis

Sample text

My colleague Martin Wolf of the Financial Times defines a “financial market” as a network of intermediaries between economic agents across time and space. This is a very good, though loaded, definition that expresses a significant aspect of modern financial markets, namely that it is not optimal to invest when money A 42 BEFORE THE MELTDOWN suddenly becomes available, but when the situation is most favorable for investments—and all on a global level. Ideally, the financial market ensures that money flows to where it is needed.

So what is new? The big financial innovation in the 1990s is a proliferation of products to manage risk, which became possible through further innovation in mathematical finance. A whole industry developed to produce ever more “exotic” financial instruments, including some that helped banks manage their risks, and calculate default probabilities. The latter was at the heart of many products that were created in the credit market. Using a modern analytical framework, it was possible—at least the users thought it was possible—to calculate default risks with A 41 THE MELTDOWN YEARS some degree of precision.

One of A 29 THE MELTDOWN YEARS the purposes of this act was to deregulate some derivatives, such as single stock futures, and to provide a more open regulatory environment in general. But, again, it would be difficult to pin the crisis down to any single one of those acts. Lax supervision is another matter. Failure by the Federal Reserve (the Fed) to supervise the subprime mortgage industry, or by the Securities and Exchange Commission (SEC) to crack down on alleged fraudsters such as Bernie Madoff almost certainly played a bigger role in this crisis than the few acts of deregulation.

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