After the Music Stopped: Causes of 2008 Financial Crisis

2008 Financial Crisis
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2008 Financial Crisis
The financial crisis in 2008 led to a global shock which led to numerous bank failures. Economic activity around the world suffered because of the crisis. In “After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead,” Alan S. Blinder analyzes the 2008 financial crisis and the measures policymakers took in response to the crisis. Blinder outlines seven “Villains” he believes contributed to the financial crisis of 2008. Two of the “Villains” are deregulation and the overrated rating agencies.
Blinder identifies deregulation as one of the “Villains” that contributed to the crisis. Deregulation came about as a result of relaxing lending standards in the mortgage industry and allowing the shadow banking system to expand. Deregulation came about as a result of the obsession of regulators with innovation rather than safety (Blinder, 2013). Regulators became exceedingly permissive toward subprime lending. At the same time, regulators were ignoring the unsolicited warnings. Despite numerous warnings from experts and the media about the possible dangers of subprime lending, regulators did not seem to pay much attention to the issue (Blinder, 2013). At the same time, the regulators were unable to resist the perceived political pressures originating from the publicized drives meant to increase home ownership. The Clinton and Bush administrations emphasized the need for people to become homeowners. Such political pressures played a major role in watering down the independence of regulators towards risky lending practices. At the same time, deregulation allowed the shadow baking system to thrive. The shadow banking system constituted nonbank loan originators that operated outside the conventional banking system and were largely unregulated (Blinder, 2013). The shadow system was larger than the traditional banking system, meaning that a vast majority of the financial activity was unregulated.
Another “Villain” is the overrated rating agencies. The credit rating agencies, led by Standard & Poor’s, Moody’s, and Fitch, played a major role in the financial crisis. The rating agencies serve to assess the creditworthiness of financial instruments and issuers. Once they assess the ability of the issuer’s ability to repay the debt, they assign ratings. The agencies are supposed to serve as safety rails to prevent the financial system from running off the road (Blinder, 2013). The AAA ratings were for the senior and super senio...