Proposals concerning the Current Financial Crisis

• Published in: Financial analysts journal Vol. 65; no. 1; pp. 25 - 27
• Main Author: Markowitz, Harry M.
• Format: Journal Article
• Language: English
• Published: Charlottesville CFA Institute 01.01.2009; Taylor & Francis Ltd
• Subjects: Banking industry; Business risks; Censuses; Collateralized mortgage obligations; Credit default swaps; Credit insurance; Credit risk; Default insurance; Economic crisis; Financial crisis; Financial instruments; Financial regulation; Financial services; Global economy; Global Financial Crisis; Housing; Insurance policies; Insurance regulation; International finance; Investment risk; Life insurance; Low income groups; Mortgage companies; Mortgage loans; Public housing; Regulation of financial institutions; Stock exchanges; Subprime lending; United States > US
• ISSN: 0015-198X; 1938-3312
• DOI: 10.2469/faj.v65.n1.4

A basic cause of the current financial crisis was the mandate from the U.S. Congress to the Federal National Mortgage Association (Fannie Mae) to increase its support of low-income housing. This mandate led to a lowering of lending standards, which encouraged home buyers to spend beyond their means. The problem was aggravated by novel, obscure, highly leveraged financial instruments that were not well understood by either lenders or borrowers. At least two steps are required for the solution to this crisis: (1) Congress should instruct Fannie Mae that the safety of the financial system must take priority over the objective of providing low-income housing, and (2) this article's "modest" proposal for bringing transparency to the tangle of financial instruments should be implemented. [PUBLICATION ABSTRACT]