Anatomy of the 2008 Financial Crisis: An Economic Analysis Postmortem

Abstract

This paper summarizes my ideas about the causes of and solutions to the 2008 financial crisis and is intended to be written so that a non-specialist can grasp the content and contribute to the discussion. The first section focuses on the immediate causes of the crisis and the appropriate short-term policy response. The latter section discusses the broader systemic causes of the crisis related to the mechanisms used in the supply of money and credit. The policy recommendations focus on addressing well-known market failures - like the lack of credible public information about the quality of debt instruments - that were exposed as a result of the crisis. Additionally, institutional reforms in the supply of money and credit designed to streamline monetary policy and limit contagion during a banking crisis are suggested.