The Great Global Financial Crises: official investigations, past and present, 1929-2011

This paper has been included in the publication
“Ideas towards a new international financial architecture?”

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In the present essay we review a set of enquiries and reports that were realized and published as a result of the major financial crises of the past and of the contemporary era.  These documents generally address the issue of the causes of collapse of bank and capital markets but also shed light on regulations proposed at different points in time to improve financial stability. We begin with reference to  official investigations   on the crisis of  1929 and the subsequent bank crises in the Great Depression which we compare with those on spawned by the Global Financial Collapse of  2008, which has produced the greatest outpouring of these types of investigations and publications  It is our hypothesis that one important avenue for a historical understanding of the great financial debacles of the past consists in a careful evaluation of official literature and documents that can complement the theoretical approaches of economists in search of explanations for these events.

Carlos Marichal, El Colegio de México

Keywords: , , ,

4 responses

  • pasbaxo says:

    Outpouring of the earth bottom could signify a more relevating explanation to recent times. Refusal to
    accumulate liquidities , the measure based on debts created products and services in the past as
    bonification could explain in compliance.

  • Gerson P. Lima says:

    Your paper is very interesting for it shows that even adding non-financial information the two main financial crises followed similar scripts. Governments, the visible face of the political power, thus supposed to take care of the people, play rigorous investigations after each crisis but always accept the solution proposed by the financial market – more regulation. However, such regulation is prepared by bankers and naturally does not contradict their veiled interests. So, nothing essential changes and the next crisis is a question of time. Actually, economists should look beyond economic and financial technicalities in the search of hidden exogenous causes of economic disasters. The ultimate cause of an (endogenous) economic phenomenon is not some (endogenous) economic phenomenon but some (exogenous) facts associated with nature and foreign relations or with decisions made by those few who are empowered to do so. As you said “This is particularly pertinent to evaluate the extent to which current banking and financial reforms around the world can be considered adequate responses to this human and economic tragedy”.

  • pasbaxo says:

    If financial-economic crises are to be remediated by governmental means , the only financial mean could exist in uprisings of taxes, especially in EU countries, where member states are forbidden to
    trade in equities.or to emit them. If the banking sector, ressorting under NCB is seperated by the governments by representing their own legal personality, their influence to governments is restricted to
    serve loans, but to governments of the EU even the reception of loans is forbidden by the same rule.
    This rule is derived from UN Governments’ debts regulation to prevent governments’and states’ insolvency, and as such not irrational. Connection of NCB to governments via parliamentary legalized law or amendements (bank laws) could deliver financial unlocking from NCBs to governments to arrange
    debtless financial suppliances, to be distributed by the Minister of Finance to crucial deficits, f.i. by means of electronic multiplication of banknotes. If too freely interpreted application would threaten , the distribution should be connected to demanded past budget reports and futurial budget plans by diverse Ministries to Minister of Finance. The function of the economist would be an advisory function, subjected to rules of democratic decison making.

  • Oscar Ugarteche says:

    The text has two very minor typos:.
    Page 14, after Dodd/Frank, something is missing.
    Page 15, all major financial “crises” over the last two centuries…

    Marichal in brief points out that historically after all major financial crises there are official studies made of how this came to happen. The last two major ones are reviewed and the reader is reminded of how the 1934 Glass Steagall act came to be and how the division between commercial banks and investments banks occurred. By opposition the 2008 crisis happened after the end of deregulation with no new reregulation attempts in terms of size nor orientation of activities.

    For the most recent crisis of 2008 he cites three major studies, one by the BanK of England, one by the White Hoiuse and one by the US Senate which point out various components of the crisis, depending on the theoretical bent of the analysts.

    The Bank of England identifies the primordial causes of the financial crisis as being generated by:
    1) severe global macroeconomic imbalances, in which countries like China and Japan had huge commercial and financial surpluses, while other countries like the United States and the United Kingdom had massive deficits;
    2) the increase of risky operations by the commercial banks, which had high leverage in their activities;
    3) the growth in the use and complexity of securitized credits;
    4) inadequate reserve capital held by major banks;
    5) excessive trust by the financial community on mathematical models and in the credit rating agencies.
    At the core of these assumptions has been the theory of efficient and rational markets. Five propositions with implications for regulatory approach have followed:
    (i) Market prices are good indicators of rationally evaluated economic value.
    (ii) The development of securitised credit, since based on the creation of new and more liquid markets, has improved both allocative efficiency and financial stability.
    (iii) The risk characteristics of financial markets can be inferred from mathematical analysis, delivering robust quantitative measures of trading risk.
    (iv) Market discipline can be used as an effective tool in constraining harmful risk taking.
    (v) Financial innovation can be assumed to be beneficial since market competition would window out any innovations which did not deliver value added.

    The report suggested that it could be wise to set up an independent European institution with the capacity to supervise the financial activities in the zone.

    The White House US Financial Crisis Inquiry Commission concluded the crisis was largely the result of the widespread belief among financiers and investors as well as central bankers, regulators, that markets could self regulate, a view that led many private actors to take very risky positions in financial markets, including extraordinarily high levels of leverage and lack of transparency, at the same time as official regulators displayed a notable lack of vision and of supervisory vigor.

    The Levin Subcommittee in the US Senate concluded after the preliminary research work to examine “four root causes of the financial crisis.”

    1.The first case study was of the huge banking firm known as Washington Mutual, which became the largest bank failure in US history, and was later absorbed by J.P.Morgan. The Senate investigation is a scathing document that reveals the extraordinary degree of impropriety and very high risks assumed by the bank directors of this enormous financial company.
    2. The report then focuses on review of the role of two of the largest credit rating agencies, Moody´s and Standard & Poor in the financial markets before the crisis.
    3. Finally, extensive hearings and in-depth studies were carried out on the enormous number of irregularities in the market conduct of two powerful banks, Goldman Sachs and Deutsche Bank, in fomenting the speculation in derivatives and so-called synthetic financial instruments which increased risk in all financial markets, but particularly those in the United States in the years 2003-2008.
    4. The hearings also reveal an enormous number of irregularities in the conduct of these very powerful financial firms.

    It also raised major questions about the issue of banks which are “too big to fail”, and therefore involve government rescues in times of crisis. The Senate inquiry clearly demonstrated the dangers inherent to contemporary financial markets as influenced by huge and very difficult to regulate banking giants, which are also not all transparent in their transactions.

    What is clear from Marichal’s review of the diagnosis of the most recent crisis is that some blame it on market failures as such while other see more a criminal element, misconduct, or ethical issues, beyond market failures as such. The globalisation/technological components of the crisis, related to the speed with which markets interact are not really present in the reviews. The fact that instant trading occurs among all financial markets led by the decisions in the two major global financial centres puts this particular crisis in a new light. The theoretical support of the efficient and rational financial markets theory gives way to the perception that markets self regulate, market prices are always correct and the relationships in the markets can be modelled. If the end result is institutions too big to fail (TBTF) then there is a conceptual problem. In the market, risk is the measure for return (Markowitz, 1952). If too much risk is taken the agent goes bust, that is the mechanism of self regulation of the market system. That is why it is a system. Instead the market does not self regulate but instead the financial sector has taken control of institutions of the State which allowed them to become TBTF. Regardless of the three reports, after they went public, both institutions (Market and Government) appear to continue functioning as if nothing happened, with local controls versus global or regional ones as the British report suggested.

    Modelling financial relationships can be helpful, but understanding when prices no longer reflect proper market valuations but are the result of price rigging agreements is extremely important. The deformation of the mortgage market followed by the deformation of the Libor rate market, the commodity markets such as gold and the exchange rate market, have all led in the US to massive fines of nearly 300 bn US$ over the six years after the crisis, instead of criminal charges. This proves first, that market prices can be rigged and may no longer reflect real values; and secondly that it does not matter. In the US this is considered misbehaviour and not a criminal offense, nor even worse, a theoretical and ethical problem that should be avoided at all costs for the market to run properly. It is assumed this is the way financial markets work, with racketeering and riskless institutions (TBTF) above the economic law of risk an return, and that it is inevitable. Fines are the way to address this fact of economic life.
    What Marichal suggests is that institutional changes over time depend on the theoretical viewpoint of how the crisis started and evolved; and how it might be prevented. The implicit suggestion is that the three reports and suggestions in the UK and US do not turn out in crisis prevention but in the assumption that this is the way the market works.

    Harry Markowitz, “Portfolio selection”, The Journal of Finance, Vol. 7, No. 1. (Mar., 1952), pp. 77-91.