Greed, financial innovation or laxity of regulation?

Abstract

Purpose The purpose of this paper is to shed light on the causes of the 2007‐2009 mortgage crisis, liquidity crisis, stock market volatility in the USA and their spillover effects on the global economy. Design/methodology/approach The paper critically reviews the 2007‐2009 financial crisis from both academic and practitioners' viewpoints. Findings The paper explores how the liquidity crisis has evolved with the advent of poorly supervised financial products, especially the credit default swaps and subprime mortgage loans. Further, it analyzes the laxity in regulations that encouraged high financial leverages, shadow banking system and excessive stock market volatility and worsened the recent financial crisis. Originality/value The implication of this paper is to understand numerous policy reforms that will help the global capital markets to be more transparent and less vulnerable to systematic risks; the suggested policy reforms may also help to prevent such financial calamities in the future.

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