The Financial Turmoil of 2007-09: Sinners and Their Sins

The causes of the financial crisis of 2007-09 are many and varied. Indeed, the crisis may be viewed as the product of a perfect storm. This paper identifies the major culprits or sinners of the U.S. crisis and enumerates their more important sins. The culprits include central bankers, commercial bankers, credit rating agencies, financial engineers, the government, investors, mortgage borrowers, mortgage brokers, and prudential bank regulators. Among the numerous sins committed by these sinners, the role of the government in encouraging and subsidizing risky home mortgages and the poor performance of the prudential regulators in adequately enforcing the in-place rules are of particular concern. The regulators were poor agents for their healthy bank and taxpayer principals. It follows that prevention of future crisis requires the development of better incentives to motivate the regulators to be more faithful to the letter and spirit of the regulations.