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Title:The unfolding turmoil of 2007 - 2008: Lessons and responses PDF Logo
Authors:Cohen, Ben
Remolona, Eli
Issue Date:2008
Series/Report no.:ADBI working paper series 124
Abstract:While the unfolding financial turmoil has involved new elements, more fundamental elements have remained the same. New elements include structured credit, the originate-to-distribute business model and the tri-party repurchase agreement. The recurrence of crises reflects a basic procyclicality in the system, which is characterized by a build-up of risk-taking and leverage in good times and an abrupt withdrawal from risk and an unwinding of leverage in bad times. To deal with the adverse liquidity spiral that has characterized the current crisis, central banks have tried to strike a balance between the importance of the continued availability of market liquidity as a public good and the moral hazard that any market intervention may induce. In proposing long-term responses to the crisis, the Financial Stability Forum has focused on areas where incentives for risk-taking may be aligned more properly and areas where risk management may be made more robust. Nonetheless a recognition that the procyclicality of the system lies at the root of the crisis would suggest more aggressive countercyclical measures are needed.
JEL:E32
E44
E58
G14
G18
G21
G24
G28
Document Type:Working Paper
Appears in Collections:ADBI Working Paper Series, Asian Development Bank Institute

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