The Next Financial Crisis

Abstract

The examination of U.S. crises reveals that the current financial crisis follows past patterns. An investment bubble creates excess demand for new financing instruments. During the railroad bubbles of the nineteenth century loans were issued at a pace higher than many companies could pay back. The current housing bubble originated from issuing sub-prime mortgages that assume that housing prices would only rise. The increased demand for credit induces financial innovations and instruments that circumvent existing regulations. Inevitably, the bubble bursts. The history of financial crises teaches that policy reforms and new regulations cannot prevent future financial crises.

Keywords: Financial Crises, Financial Regulations and Reforms, Banking Panics, Banking Runs, Nineteenth and Twentieth Century Crises, Bankruptcies, Federal Reserve Bank, Subprime Mortgage, Troubled Asset Relief Program (TARP), Collateralized Debt Obligations (CDO), Mortgage Backed Securities (MBO)

JEL Classification: E0, E3, E44, E5, E6, N0, N1, N2, G0, G18, G38