Bob Rubin Identified Multiple Causes For Financial Crisis

Sat Apr 17, 2010, 1:56 am | 4 Comments

Bob Rubin is one of two executives who guided CitiGroup into the center of the financial storm offered his regrets on Thursday, April 8 to a federal committee examining the crisis.

Robert E. Rubin has been an influential Citigroup board member and adviser, and at various times, chief of Goldman Sachs, and Secretary of the Treasury during the Clinton administration.

In his report to the commission, Bob identified multiple causes for the financial crisis, which formed a toxic cocktail that, he claims, “almost all of us” missed.

…. market excesses; low interest rates—due notably to large capital inflows from trade surplus countries—which contributed to excessive risk-taking by lenders and excessive borrowing by businesses and consumers; a sharp rise in housing prices, also contributing to increased consumer leverage; a subsequent, precipitous drop in housing prices; vast increases in the use and complexity of derivatives; misguided AAA ratings on subprime-mortgage based instruments; lax and abusive mortgage lending practices; shortfalls in regulation; high levels of leverage in financial institutions joined with deteriorating quality in asset purchases; and much else.

Below are the causes for the financial crisis that Bob indicated and the analysis and comments by folks in the media at various times:

1. Market excesses

   Stronger regulation should be the first line of defense against excessive speculation that could send the economy into a new crisis, Federal Reserve Chairman Ben Bernanke said Sunday. Continue Reading…

2. Low interest rates

   Federal Reserve Governor Daniel Tarullo said the economy’s need for low interest rates probably won’t abate soon and that the central bank shouldn’t sell assets from its balance sheet until the recovery is well-established. Continue Reading…

3. A sharp rise in housing prices

   After three years of sharp house price falls, the US housing market seems to be finally stabilizing. Continue Reading…

4. A subsequent and precipitous drop in housing prices

   A great deal of attention has recently been devoted to examining trends in the housing market and to predicting possible outcomes of the recession. Continue Reading…

5. Vast increases in the use and complexity of derivatives

   Derivatives use is a relatively recent phenomenon, dating back to around the 1970s. Continue Reading…

6. Misguided AAA ratings on subprime-mortgage based instruments

   A primary cause of the recent credit market turmoil was over dependence on credit ratings and credit rating agencies. Continue Reading…

7. Lax and abusive mortgage lending practices

   There are many examples of abusive lending practices in our society, and all have different solutions and answers. Continue Reading…

8. High levels of leverage in financial institutions

   The struggle for financial regulatory reform in Washington will fail if the debate continues to focus mainly on the bookends of the crisis – the original subprime shock and the eventual federal bailout. Continue Reading…

In a Nutshell

Bruce Yandle, a professor of economics emeritus at Clemson University, writes

Accounting standards, credit ratings, and credit-default swaps were created to help facilitate financial transactions by fostering trust. In the run-up to the credit-market freeze of 2008 those assurance mechanisms collapsed under the weight of political and regulatory pressures to aggressively expand home ownership and other policies. Continue Reading…

What do you think?

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