The Finance Crisis and Rescue: What Went Wrong? Why? What Lessons Can Be Learned?

K.V. Nagarajan is a professor in the Department of Economics at
Laurentian University.

This book is a compilation of short articles written by faculty members at the Rotman School of Management, University of Toronto. Without an editor to pull things together, the book suffers from repetition, and some entries do not fit into the theme of the book.

Nevertheless, the book is well worth reading. Its merit is accessibility to lay readers. The financial crisis of 2008 is a complex story, but the authors tell a simplified one, capturing its essence well.

Briefly, the story they collectively tell is one of tracing the trouble to developments in the U.S. housing market. Rising housing prices, low interest rates, and easy lending terms created a surge in mortgage lending activity. The mortgages were then packaged as asset-backed securities and sold off to institutional investors around the world. The speculative bubble then was underway. As long as housing prices kept going up and the mortgage holders kept up with their payments, everything was fine. When the default rates began to rise and housing prices fell in 2007, the whole house of cards came tumbling down. Within a short time, house owners, mortgage lenders, investment bankers, and insurers all found themselves going insolvent.

Why did this happen? As one author (Elitzer) puts it, it was all due to lack of integrative thinking. Others authors point to failures in terms of leadership, regulatory mechanisms, governance structures, and accountability.

For a book coming out of Canada, there is surprisingly little discussion of the Canadian situation other than to say that thanks to its conservative financial practices Canada escaped the crisis. However, the economy took a hit due to its trade links with the U.S. However, according to Dungan, the impact is likely to be “milder” than the recessions of 1990–92 and 1981–2. This assertion remains to be verified.

Many lessons are drawn to prevent the financial crisis from happening again. How many of these lessons will be acted upon remains to be seen.