Tarr, David G.2012-03-192012-03-192010-05-01https://hdl.handle.net/10986/3810This paper discusses the key regulatory, market and political failures that led to the 2008-2009 United States financial crisis. While Congress was fixing the Savings and Loan crisis, it failed to give the regulator of Fannie Mae and Freddie Mac normal bank supervisory power. This was a political failure as Congress was appealing to narrow constituencies. In the mid-1990s, to encourage home ownership, the Administration changed enforcement of the Community Reinvestment Act, effectively requiring banks to lower bank mortgage standards to underserved areas. Crucially, the risky mortgage standards then spread to other sectors of the market. Market failure problems ensued as banks, mortgage brokers, securitizers, credit rating agencies, and asset managers were all plagued by problems such as moral hazard or conflicts of interest. The author explains that financial deregulation of the past three decades is unrelated to the financial crisis, and makes several recommendations for regulatory reform.CC BY 3.0 IGOACCESS TO CREDITACCOUNTINGACCOUNTING STANDARDSAFFORDABLE HOUSINGASSET MANAGERASSET MANAGERSASYMMETRIC INFORMATIONBACKED SECURITIESBAILOUTBAILOUTSBALANCE SHEETBALANCE SHEETSBANK HOLDINGBANK LENDINGBANK POLICYBANK SUPERVISIONBANKING REGULATIONBANKING SUPERVISIONBANKING SYSTEMBANKRUPTCIESBANKRUPTCYBARRIER TO HOMEOWNERSHIPBASIS POINTSBONDBONDHOLDERSBORROWERBORROWINGBROKERSCAPITAL MARKETCAPITAL MARKETSCAPITAL REQUIREMENTSCASH FLOWCASH FLOWSCLEARING CORPORATIONCOLLATERALCOLLATERAL POOLSCOLLECTIVE ACTIONCOMMERCIAL BANKSCOMMERCIAL LOANSCOMMERCIAL MORTGAGECOMMUNITY LENDINGCOMMUNITY REINVESTMENTCONFLICT OF INTERESTCONFLICTS OF INTERESTCONSUMER EXPENDITURESCONSUMER LOANSCONVENTIONAL MORTGAGESCREDIT DEFAULTCREDIT DEFAULT SWAPCREDIT DEFAULT SWAPSCREDIT HISTORYCREDIT MARKETSCREDIT NEEDSCREDIT OFFICERCREDIT QUALITYCREDIT RATINGCREDIT RATING AGENCIESCREDIT RATINGSCURRENCYDEBTDEBT INSTRUMENTDEBT OBLIGATIONSDEBTSDEDUCTIBLEDEFAULT RATEDEFAULTSDEFICITSDEPOSITDEVELOPING COUNTRIESDOWN PAYMENTDOWN PAYMENTSEFFICIENT MARKETEXCHANGE COMMISSIONFAIR VALUEFAIR VALUESFAMILIESFEDERAL BUDGETFEDERAL DEPOSIT INSURANCEFEDERAL HOUSINGFEDERAL HOUSING ENTERPRISESFEDERAL INCOME TAXFEDERAL RESERVEFEDERAL RESERVE BANKFINANCIAL CRISESFINANCIAL CRISISFINANCIAL DEREGULATIONFINANCIAL INSTITUTIONFINANCIAL INSTITUTIONSFINANCIAL INSTRUMENTFINANCIAL INSTRUMENTSFINANCIAL MARKETFINANCIAL MARKET PARTICIPANTSFINANCIAL MARKETSFINANCIAL OBLIGATIONSFINANCIAL REGULATORSFINANCIAL SAFETYFINANCIAL SERVICESFINANCIAL SYSTEMFIRST TIME HOME BUYERSFIXED RATEFRAUDFREE LOANSGLOBAL BANKINGGLOBALIZATIONGOVERNMENT GUARANTEESGOVERNMENT POLICIESHOLDINGSHOME BUYERSHOME EQUITYHOME EQUITY LOANHOME MORTGAGEHOME MORTGAGESHOME OWNERSHIPHOMEOWNERHOMEOWNERSHOMEOWNERSHIPHOUSEHOLDSHOUSING FINANCEILLIQUID MARKETSIMPLICIT GOVERNMENT GUARANTEEIMPLICIT GOVERNMENT GUARANTEESINCOME TAXINCOME TAXESINSTRUMENTINSURANCE COMPANIESINSURANCE CORPORATIONINTEREST PAYMENTSINTEREST RATEINTEREST RATE POLICIESINTEREST RATE RISKINTEREST RATESINTERNATIONAL BANKINTERNATIONAL FINANCEINVESTINGINVESTMENT BANKINGINVESTMENT BANKSINVESTMENT FUNDSLENDERSLIQUIDITYLIQUIDITY CRISISLIQUIDITY PROBLEMSLOANLOAN GUARANTEESLOAN PERFORMANCELOW INTEREST RATELOW INTEREST RATESLOW-INCOME FAMILIESMARK TO MARKETMARK TO MARKET ACCOUNTINGMARKET FAILUREMARKET FAILURESMARKET MAKERMARKET PARTICIPANTSMARKET PRICEMARKET STABILITYMARKET VALUEMARKET VALUESMINIMUM CAPITAL REQUIREMENTSMONETARY FUNDMONETARY POLICYMONEY MANAGERSMONEY SUPPLYMORAL HAZARDMORTGAGEMORTGAGE BROKERSMORTGAGE INDUSTRYMORTGAGE INTERESTMORTGAGE INTEREST RATESMORTGAGE MARKETMORTGAGE RATESMUTUAL FUNDMUTUAL FUNDSNO CREDIT HISTORYORIGINAL CONTRACTSPENSIONPENSION FUNDSPOLITICAL ECONOMYPORTFOLIOPORTFOLIOSPOTENTIAL INVESTORSPRICE STABILITYPRINCIPAL-AGENT PROBLEMPRIVATE BANKSPRIVATE ENTERPRISESPRIVATE FINANCIAL INSTITUTIONSPRIVATE FINANCIAL MARKETPRUDENTIAL REGULATIONPRUDENTIAL SUPERVISIONPUBLIC FUNDSPUBLIC POLICYRATE OF RETURNRATES OF INTERESTREGULATORY STANDARDSREINVESTMENTRESERVESRESIDENTIAL MORTGAGESRETURNRETURNSRISKY ASSETSRISKY LOANSRISKY SECURITIESSAFETY NETSAVINGSSAVINGS ACCOUNTSSECONDARY MARKETSECONDARY MARKETSSOLVENCYSOURCE OF INCOMESUBORDINATED BONDSSUBORDINATED DEBTSUPERVISORY AUTHORITYSUPERVISORY POWERSUPERVISORY POWERSTAXTAX CREDITTAX POLICIESTAX RETURNSTRADINGTRANCHETRANCHESTREASURYUNDERLYING MORTGAGEURBAN AREASURBAN DEVELOPMENTVALUATIONWorld Bank10.1596/1813-9450-5324