What Caused the Current Financial Mess and What Can We Do About It?

Journal Of Investment Management (JOIM), Fourth Quarter 2009

Posted: 19 Jan 2010 Last revised: 19 Oct 2010

See all articles by John H. Boyd

John H. Boyd

University of Minnesota - Twin Cities - Carlson School of Management

Ravi Jagannathan

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad

Sungkyu Kwak

Washburn University

Editor, JOIM

Journal of Investment Management (JOIM)

Date Written: January 19, 2010

Abstract

This study reviews the causes and evolution of the financial crisis and surveys some of the recent literature on this topic. It documents how bank regulation became essentially ineffective due to the rise of “quasi-banks,” that is, large financial intermediaries that perform banking functions but are not chartered or regulated as banks. Further, it shows that the problems in banking were primarily concentrated in very large banks, ones that were believed to be too big to fail (hereafter, TBTF) by the market. While we cannot “prove” that the TBTF policy caused the crisis, the data suggest it may have played a key role. The concluding section deals with policy prescriptions and is unabashedly judgmental, reflecting our views. It lays out our policy recommendations for regulatory reform, recent criticisms of those recommendations, and some counter-arguments.

Keywords: Banking crisis, financial crisis, too big to fail

JEL Classification: G00

Suggested Citation

Boyd, John H. and Jagannathan, Ravi and Kwak, Sungkyu and Editor, JOIM, What Caused the Current Financial Mess and What Can We Do About It? (January 19, 2010). Journal Of Investment Management (JOIM), Fourth Quarter 2009. Available at SSRN: https://ssrn.com/abstract=1539209

John H. Boyd

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-1834 (Phone)

Ravi Jagannathan

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
429 Andersen Hall
Evanston, IL 60208
United States
847-491-8338 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Sungkyu Kwak

Washburn University ( email )

1700 SW College Ave
Topeka, KS 66621
United States
785-670-1821 (Phone)
785-670-1063 (Fax)

JOIM Editor (Contact Author)

Journal of Investment Management (JOIM) ( email )

3658 Mt. Diablo Blvd.
Suite 200
Lafayette, CA 94549
United States
925-299-7800 (Phone)
925-299-7815 (Fax)

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