Global Securities Markets: Navigating the World's Exchanges and OTC Markets

THE PANIC OF 2008 IN CONTEXT

When former Chairman of the Federal Reserve Alan Greenspan testified to Congress in October 2008 that the intellectual edifice had collapsed in the summer of 2007, he was talking about the entire regulatory framework and risk management system underpinning the U.S. financial services industry. To be sure, immediate causes of the 2008 panic are readily apparent. To name four:

1. The Taxpayer Relief Act of 1997 eliminating capital gains taxes on primary residences and thereby precipitating a housing boom aided and abetted by a government policy encouraging home ownership whether through the operations of quasi-governmental agencies such as Fannie Mae and Freddie Mac or through bank community reinvestment mandates.

2. The failure of the Commodity Futures Modernization Act of 2000 to comprehensively regulate derivatives.

3. The development of a securitized debt market where the persons having direct contact with the borrower obtained origination fees but did not assume any credit risk on the loan and where investors who bought these securitized loans overly relied on rating agencies to assess their risk.

4. An excessive use of leverage underpinned by faulty risk metrics and lax credit extension policies.

Focusing on these immediate causes, however, is like focusing on the political rivalries in the Balkans as the cause of World War I. The real cause was much more fundamental in that there had been a philosophical shift in the role of regulation and government ...