14 Pages Posted: 23 Jan 2009
Date Written: December 2008
This paper investigates some of the underlying drivers of the 2008 global financial crisis. It is argued that a functioning system requires sufficient property in form of bank capital to absorb losses (banks and central banks), collateral to secure loans (enterprises) and adequate levels of interest rates to compensate for the burdening of property in this process. Thus interest rates set too low cause severe imbalances and the availability of unimpaired property assets determines the creation of money and credit. Two key principles of central banking were breached before and during the crisis. Firstly, very low interest rates by the two largest central banks triggered the crisis by helping to create the subprime asset bubble. Secondly, the recent lowering of collateral standards and balance sheet expansion by the Federal Reserve are possibly ineffective and expensive central bank policy responses. It is shown that the underlying issue of the crisis - the solvency of banks - cannot be addressed by a central bank but requires the state acting as a "proprietor of last resort" who directly recapitalizes banks. It is suggested that significant government intervention in bank lending may be required to stop the crisis from further deteriorating.
Keywords: Financial crisis, subprime crisis, mortgage, money, monetary policy, property economics, central banking, nature of money, youth bulge, property
JEL Classification: E50, E58, N100, G21, G24, J11
Suggested Citation: Suggested Citation
Heinsohn, Gunnar and Decker, Frank and Heinsohn, Ulf, A Property Economics Explanation of the 2008 Global Financial Crisis (December 2008). Available at SSRN: https://ssrn.com/abstract=1331712 or http://dx.doi.org/10.2139/ssrn.1331712