More theories on the credit crunch

Feb 11, 2009
Bishop Hill in Economics

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.

 

 

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