An Overview of the Crisis: Causes, Consequences, and Solutions

26 Pages Posted: 1 Mar 2010

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Elena Carletti

Bocconi University - Department of Finance; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS)

Abstract

What caused the crisis? Initially many thought that it was due to incentive problems in the U.S. mortgage industry. However, after the large economic meltdown following Lehman Brothers' bankruptcy in September 2008, it seems that much more was going on. We argue that there was a bubble in real estate prices in the United States and a number of other countries. The main causes of the bubble were loose monetary policy, particularly by the United States Federal Reserve, and global imbalances. The combination of cheap credit together with the easy availability of funds contributed to create the bubble. Many other factors such as subprime mortgages, weak regulatory structures, and high leverage in the banking sector exacerbated the effects of the crisis. We consider possible reforms aimed at minimizing the occurrence of future crises in the governance structure of central banks, measures to reduce global imbalances, and changes in banking regulation.

Suggested Citation

Allen, Franklin and Carletti, Elena, An Overview of the Crisis: Causes, Consequences, and Solutions. International Review of Finance, Vol. 10, Issue 1, pp. 1-26, March 2010. Available at SSRN: https://ssrn.com/abstract=1560183 or http://dx.doi.org/10.1111/j.1468-2443.2009.01103.x

Franklin Allen (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Elena Carletti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

Villa La Fonte, via delle Fontanelle 18
50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

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