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PurposeThe purpose of this paper is to discuss the key regulatory, market, and political failures that led to the 2008‐2009 US financial crisis and to suggest appropriate recommendations for reform.Design/methodology/approachThe approach is to examine the underlying incentives that led to the crisis and to provide supporting data to support the hypotheses.FindingsWhile Congress was fixing the savings and loan crisis, it failed to give the regulator of Fannie Mae and Freddie Mac normal bank supervisory power. This was a political failure as Congress was using government sponsored enterprise (GSE) resources and the resources of narrow constituencies for their own advantage at the expense of the public interest. Second, in the mid‐1990s, to encourage home ownership, the Administration changed enforcement of the Community Reinvestment Act, effectively requiring banks to use flexible and innovative methods to lower bank mortgage standards to underserved areas. Crucially, this disarmed regulators and the risky mortgage standards then spread to other sectors of the market. Market failure problems ensued as banks, mortgage brokers, securitizers, credit rating agencies, and asset managers were all plagued by problems such as moral hazard or conflicts of interest.Originality/valueThe paper focuses on the political economy reasons for why Congress and US administrations provided these perverse incentives to the GSEs and banks to lower mortgage standards. It also proposes some innovative methods of improving bank regulation that address the regulatory capture problem.

This paper uses a unique database covering 44 countries in sub-Saharan Africa between 2000 and 2007 to study the determinants of the allocation and composition of private capital flows across countries, as well as channels through which these flows could affect growth. In the sample, the degree of financial market development is an important determinant of the distribution of capital flows across countries, as opposed to property rights institutions. The fairly consistent positive association between net capital flows and growth for sub-Saharan African countries is encouraging, though the data do not allow for making conclusive inferences about a causality relationship.

Developing countries have responded to the multiple shocks from the food, fuel and finance crises of 2008-2009 with a mix of responses aimed at both mitigating the immediate impacts of the crises on households (and particularly children), and protecting future investments in human capital. While some countries have introduced new safety net programs, others have modified and/or expanded existing ones. Since many countries have introduced conditional cash transfers (CCTs) in recent years, these programs have been used as an important starting point for a response. This paper aims to describe how conditional cash transfers have been used by different countries to respond to the crises (e.g. by expanding coverage and/or increasing benefit amounts), distill lessons about their effectiveness as crisis-response programs, identify design features that can facilitate their ability to respond to transient poverty shocks, and assess how they can complement other safety net programs.

Previous research on the relationships between macroeconomic conditions and health status reveal improvements in physical health during economic downturns. However, few studies have examined whether mental health status improves or declines during tough economic times. This paper estimates the effect of a key macroeconomic indicator, the state-level unemployment rate, on health-related quality of life. Analyzing recent data from Waves 1 and 2 of the NESARC and controlling for individual heterogeneity with fixed-effects models, our study suggests that health-related quality of life, both physical and mental, worsens with increases in the unemployment rate. Although the effect sizes are relatively small in magnitude for both outcomes, the impact is more pronounced for mental health. These results raise questions about the unexpected findings reported in earlier studies of a health-improving effect of economic downturns and suggest that the current worldwide economic recession may have some serious hidden costs.

Yemen is an oil-exporting and food-importing country with the highest levels of poverty in the Middle East and North Africa. The impacts of the triple crisis are likely to further complicate pre-existing conditions of conflict, oil depletion and governance failure. Using a dynamic CGE model, this article finds that oil-driven growth in 2008 dominated the negative growth impacts of the food crisis, but that growth was not pro-poor. The financial crisis of 2009 slowed growth sharply and raised the poverty rate to 42.8%, up from 34.8% in 2005/6. Poverty continues to be higher in rural areas, where almost half the population live in poverty.

This paper examines the effect of the financial crisis on off-farm employment of China's rural labor force. Using a national representative data set collected from across China, the paper finds that there was a substantial impact. By April 2009 the reduction in off-farm employment as a result of the crises was 6.8 percent of the rural labor force. Monthly earnings also declined. However, while it is estimated that 49 million were laid-off between October 2008 and April 2009, half of them were re-hired in off-farm work by April 2009. By August 2009, less than 2 percent of the rural labor force was unemployed due to the crisis. The robust recovery appears to have helped avoid instability.

This paper explores the macroeconomic implications of financing for retirement in advanced economies. It offers an additional theoretical explanation of the possible long-term drivers of the 2007-2009 financial crisis. It develops a simple integrated macro-financial model of monetary production, and suggests that the increasingly systemically important retirement institutions present incentives not aligned with the macroeconomic needs of financing for retirement. It thus identifies demographic change and retirement finance as one of the underlying causes of build-up of intrinsic fragility in the financial sector.

The ongoing financial crisis has raised concerns in many circles about a potential future wave of sovereign defaults spreading among developing countries and, therefore, the need for additional rounds of debt relief in poor indebted countries. This paper addresses this issue for a group of 31 International Development Association (IDA)-only African countries, which are in a fragile debt situation. Using the most recent debt sustainability analyses (DSAs) undertaken for these countries by the World Bank and the IMF, this paper studies the potential adverse effect of the ongoing financial crisis on the countries' debt burden indicators, as a function of the depth and length of the crisis. The latter is measured by the fall and the duration of such fall in exports revenues, and by the terms at which each country can obtain financing to muddle through the crisis period. The analysis underscores the importance of concessional financing for these countries, especially if the crisis proves to be a protracted one. This, because the likelihood of countries being able to muddle through the crisis without defaulting on their external debt decreases with the hardening of the financial conditions faced by them--alternatively, the size of the downsizing in domestic (fiscal) expenditures needed to ensure the service of their foreign debts increases with the tightening of financial conditions.

The global economic crisis has caused economic collapse in many countries. Indonesia is obviously affected by this crisis, its export growth declined significantly. Nevertheless, the impact of the crisis on the Indonesian economy is relatively limited compared to other countries in the region, including Singapore, Malaysia, and Thailand. This situation leads into a question of why the impact of the global crisis on the Indonesian economy is relatively limited so far. Is it because of the structure of Indonesia's trade or the effectiveness of Indonesia's fiscal policy and monetary response? This paper argues that there are at least two reasons why Indonesia's performance was relatively good. Firstly, it was due to the appropriate policy responses both from Bank Indonesia and the Indonesian government. Secondly, Indonesia's relatively small export share to GDP saved the country from the global financial crisis. This was more a case of good luck than deliberately planned economic policy strategy. Nevertheless, this paper indicates that exports are a source of Indonesia's economic growth. Exports have a large effect in supporting economic growth, albeit less stable compared to domestic demand. Because of this, a strategy safeguarding a balance between domestic economy and global orientation, such as becoming a part of a production network and promoting export-oriented growth, must be a part of the development strategy of the national economy.

The financial crisis arose in the industrial countries, but has affected developing countries through higher interest rates, sharp changes in commodity prices, and reductions in investment, trade, migration and remittances. For most low-income countries, shocks that affect food prices or wage rates for unskilled workers seem likely to have the largest impact on poverty, with the declines in key food prices associated with the crisis helping to reduce poverty, while declining trade, investment, and remittance flows have had adverse impacts on the poor. Policies to address the crisis must include measures to deal with financial sector problems, the resulting reductions in aggregate demand, and the particular vulnerabilities of poor people. Given the complexity of the impacts from financial crises and commodity price shocks, there is a strong case for developing better social safety net policies that can offset the adverse impacts of a wide range of different shocks on poor people without creating costly market distortions.

The financial crisis has re-ignited the fierce debate about the merits of financial globalization and its implications for growth, especially for developing countries. The empirical literature has not been able to conclusively establish the presumed growth benefits of financial integration. Indeed, a new literature proposes that the indirect benefits of financial integration may be more important than the traditional financing channel emphasized in previous analyses. A major complication, however, is that there seem to be certain"threshold"levels of financial and institutional development that an economy needs to attain before it can derive the indirect benefits and reduce the risks of financial openness. This paper develops a unified empirical framework for characterizing such threshold conditions. The analysis finds that there are clearly identifiable thresholds in variables such as financial depth and institutional quality -- the cost-benefit trade-off from financial openness improves significantly once these threshold conditions are satisfied. The findings also show that the thresholds are lower for foreign direct investment and portfolio equity liabilities compared with those for debt liabilities.

The Subprime crisis largely resulted from failures to internalize systemic risk evenly across financial intermediaries and recognize the implications of Knightian uncertainty and mood swings. A successful reform of prudential regulation will need to integrate more harmoniously the three paradigms of moral hazard, externalities, and uncertainty. This is a tall order because each paradigm leads to different and often inconsistent regulatory implications. Moreover, efforts to address the central problem under one paradigm can make the problems under the others worse. To avoid regulatory arbitrage and ensure that externalities are uniformly internalized, all prudentially regulated intermediaries should be subjected to the same capital adequacy requirements, and unregulated intermediaries should be financed only by regulated intermediaries. Reflecting the importance of uncertainty, the new regulatory architecture will also need to rely less on markets and more on"holistic"supervision, and incorporate countercyclical norms that can be adjusted in light of changing circumstances.