Blindsided by the Financial Crisis.

• Author: Murray, Phil R.

After the Crash: Financial Crises and Regulatory Responses

Edited by Sharyn O'Halloran and Thomas Groll

415 pp.; Columbia University Press, 2019

Sharyn O'Halloran is a professor of political economics and an administrator at Columbia University, where Thomas Groll is a lecturer. The two are editors of this collection of papers by academics, banking industry executives, and government officials on financial regulation in the wake of the 2008 financial crisis. "We hope," the editors say, "the chapters shed light on how to think about the risky business that was the financial crisis, how ad hoc policy responses came about often in the depths of uncertainty and surrounded by controversy about effectiveness and fairness, and how we can do better in the future to manage risk and prevent crises that affect so many."

Toxic securities/In the first chapter, O'Halloran, Groll, and Geraldine McCallister describe the events leading up to the Great Recession. Let me quote at length their view of the causes:

Exorbitant risk-taking by financial institutions inadequately overseen by regulators triggered the financial crisis. The housing market's boom and bust underscores these lessons: permissive regulations allowed banks to offer mortgages with small down payments to buyers who had insufficient income to afford them. Compensation practices at financial firms rewarded volume and short-term performance over long-term sustainable returns. And credit rating agencies, laden with conflicts of interest, gave investment-grade ratings to subprime mortgages made [sic] them willing to designate tranches of subprime mortgages as investments-grade assets in exchange for a fee. As the housing bubble burst and prices declined, the underlying value of the mortgages that secured these assets fell into default. The subsequent mortgage crisis led to a liquidity crunch brought on by inadequate price discovery of asset valuations and uncertainty about credit risk. These highly leveraged mortgage-backed securities, assigned triple-A ratings by credit agencies and with scant regulatory oversight, were exactly the funds that drove Bear Stearns into insolvency. They blame both the market and government. Former House Financial Services Committee chair Barney Frank discusses "permissive regulations" in a later chapter. He argues that the market is mostly to blame because securitization and financial derivatives were inadequately regulated. He attempted to change the regulations before house prices crashed, but political opposition stopped him. According to Frank, "the reason for the flood of mortgages destined for foreclosure, the single biggest cause of the crash, was the self-interest of lenders in maximizing their profits." If someone asked Frank why...