Wednesday
Feb112009
by
Bishop Hill

More theories on the credit crunch


Two New York economists argue that the causes of the credit crunch were
- banks developing off-balance sheet ways around their legally mandated capital requirements
- government guarantees of "too big to fail banks" encouraged excessive risk-taking
In a world without regulation, creditors of financial institutions (depositors, uninsured bondholders, etc.) would put a stop to excesses of risk and leverage by charging higher costs of funding, but lack of proper pricing of deposit insurance and too-big-to-fail guarantees has distorted incentives in the financial system.
Reader Comments