It Is Common to Argue That the Financial Crisis of 2007 – 2008 Was the Result of Financial Innovations Like Collateralized Debt Obligations (Cdos) and Credit Default Swaps (Cdss), Created by Greedy Bankers Who Did Not
It is common to argue that the financial crisis of 2007 – 2008 was the result of financial innovations like collateralized debt obligations (CDOs) and credit default swaps (CDSs), created by greedy bankers who did not understand their own creations (e.g. McDowell 2011). Do you agree or disagree with this analysis? Give reasons for your answer.
Greedy can be defined as having a strong desire to have more than you have already got. The bankers discussed in this piece, who were involved in the creation of products they knew little about, fit this definition perfectly. Collateralized debt obligations (CDOs) are an example of one of these products. They are bonds linked to loan packages that are sold to investors for a price that reflects their level of risk; and so are separated the originator of the debt from the bearer of the by-product. Parts of these CDOs are then supposedly insured by a complex financial instrument, known as a credit default swap (CDS), to free them from any risk they may have. However, due to their complexity, the bankers who produced them did not comprehend the extent at which the economy could be affected by their ‘risk free’ innovation, and so their lack of understanding and their blindness to everything other than their own assets, led to the creation of one of the root causes for the financial crisis. Through analysing and evaluating a variety of academic sources which explore the causes of the financial crisis of 2007-2008, I aim to prove my argument that I agree with the analysis posed in the title- that due to the greed and ignorance of bankers, their financial innovations were the main cause of the financial crisis. This essay will begin by discussing the viewpoints of Paul Mason on the awareness of bankers towards the products they were producing and selling, the reasons behind the creation of these products, and the impact that these financial innovations had upon the economy. It shall then examine the implications of Andrew W. Lo,
Greedy can be defined as having a strong desire to have more than you have already got. The bankers discussed in this piece, who were involved in the creation of products they knew little about, fit this definition perfectly. Collateralized debt obligations (CDOs) are an example of one of these products. They are bonds linked to loan packages that are sold to investors for a price that reflects their level of risk; and so are separated the originator of the debt from the bearer of the by-product. Parts of these CDOs are then supposedly insured by a complex financial instrument, known as a credit default swap (CDS), to free them from any risk they may have. However, due to their complexity, the bankers who produced them did not comprehend the extent at which the economy could be affected by their ‘risk free’ innovation, and so their lack of understanding and their blindness to everything other than their own assets, led to the creation of one of the root causes for the financial crisis. Through analysing and evaluating a variety of academic sources which explore the causes of the financial crisis of 2007-2008, I aim to prove my argument that I agree with the analysis posed in the title- that due to the greed and ignorance of bankers, their financial innovations were the main cause of the financial crisis. This essay will begin by discussing the viewpoints of Paul Mason on the awareness of bankers towards the products they were producing and selling, the reasons behind the creation of these products, and the impact that these financial innovations had upon the economy. It shall then examine the implications of Andrew W. Lo,
References: Mason, P. (2010). Meltdown: The End of the Age of Greed. London: Verso. Lo, A W. (2012). Reading About the Financial Crisis: A Twenty One Book Review. Journal of Economic Literature. McDowell, L. (2011). Making a drama out of a crisis: representing financial failure or a tragedy in five acts. Transactions of the Institute of British Geographers. Gorton, G. (2010). Slapped by the Invisible Hand: The Panic of 2007. Oxford University Press. Akerlof and Shiller. (2009). Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. Princeton University Press.