The Causes of the 2008 Financial Crisis
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As the result, the reliability of the capitalization ratios based on US GAAP and their ability to measure banks financial strength had been questioned, especially after derivatives hit the bank balance sheets in a big way. The supporters of this point of view rejected the existing opinion that policies similar to those of Franklin D. Roosevelt from the time of the significant depression might save the day.9 FDR had no derivatives problem, they argued, and therefore old logic and conceptual approaches won’t work in the new economic environment. Supporters of all points of view were united in believing that the US Congress should hold hearings related to financial reform. They were all in favor of coming to an understanding that if a regulatory modernization adequately addresses only a single risk, it is destined to fail. Every potential threat to the financial system must be an integral part of the comprehensive legislative response to the economic crisis. Even if financial reporting did play some role in fueling the crisis, changing accounting rules that cover an insignificant percentage of assets that banks mark to market is probably not going to make a big difference. It seems that along with looking into the notion of capital adequacy based on capitalization ratios, it is also essential to restructure banks’ business models. For example, as a part of the restructuring project, it had been recommended that the most relevant information about bank financial strength should come from the stress testing of cash balances and future cash in- and outflows. For a bank with no derivatives on its balance sheet, a strong correlation between a static capitalization ratio (based on accounting rules) and the probability of future insolvency is obtainable and might be relevant; but for a bank holding loads of derivatives, that correlation might be spurious.10 Regardless of who or what to hold responsible, the periodical press had delivered the “consensus” verdict that the total devotion to the free market fostered the economic recession. Jacob Weisberg’s Slate column “The End of Libertarianism” sums up this official verdict: We have narrowly avoided a global depression and are mercifully pointed toward merely the worst recession in a long while thanks to a global economic meltdown made possible by the libertarian idea. Any competent forensic work has to put the libertarian theory of selfregulating financial markets at the scene of the crime.11 Generally speaking, the press made Alan Greenspan, Phil Gramm (former chairman of the Senate Banking Committee), and SEC chairman Christopher Cox responsible for the crisis. Moreover, they proclaimed that the warnings about the growing market in credit derivatives were ignored for ideological reasons. To reinforce the idea that the free market is to blame for the crisis, interestingly enough, Alan Greenspan himself testified to Congress on October 23, 2008, that he had been “shocked” that
