In the Wake of Financial Crisis
Linda M. Beale
Wayne State University Law School
International Monetary Fund (IMF), Current Developments in Monetary and Financial Law, Vol. 5, Forthcoming 2010
Wayne State University Law School Research Paper No. 10-07
Neo-liberal deregulatory and privatization policies gradually swept away Depression-era restrictions on financial institutions that had provided a staid, conservative, and robust financial system. The erosions of prudent limitations ultimately led to an insatiable demand for short-term profits to feed outsized compensation packages. Speculative proprietary trading desks gambled with other people’s money. An out-of-sight “shadow” banking system developed that also engaged in market speculation, often utilizing financial derivatives. Financial innovations meant debt was extraordinarily profitable for the system, although it created harsh pressures on an overworked and underpaid American consumer and unrealistic expectations of ongoing financial institution profits from securitizations. The result was a financial crisis involving the near-implosion of global banking and trillions in taxpayer-funded relief for the global financial system, with a cascading and disastrous effect on U.S. communities, jobs, and individual livelihoods.
This article, growing out of a December 2009 presentation at an IMF conference, explores the causes of the financial crisis, and whether or to what extent fair value accounting rules were culpable. In particular, it considers the expressed concern that fair value accounting’s mark-to-market rules create a pro-cyclical effect that creates panics and insolvencies that would otherwise be nonexistent and are sufficiently central that they could trigger the near-collapse. The article argues that fair value accounting is not the villain it is made out to be. On the other hand, the article suggests that off-balance sheet securitization was a genuine factor in the crisis that should be addressed. The article briefly discusses reforms proposed by the Treasury Department and included in the Dodd-Frank reform legislation. It concludes with a concern that the main causative factors remain only partially remedied to date.
Number of Pages in PDF File: 29
Date posted: September 24, 2010