Current Thinking on the Financial Crisis and the Way Forward

A great crisis can produce great leaps forward in thought and human achievement. So is there any evidence that the epic financial crisis of 2008 will leave a legacy of fruitful ideas for our financial system and investing just as World War II, the Cold War, and the Space Race led to stellar advances in technology?

Perhaps because it’s still fairly recent, there isn’t much consensus yet about what caused the crisis. Seemingly, we were wrong to blame bankers, put too much faith in corporate governance, were not properly diversifying our portfolios, and are probably wasting our time worrying about the euro. The good news is that future-proof solutions are being generated (according to our team of CFA Digest abstractors) and these revolve around better, simpler regulation, more robust investing techniques and improved tools for investors.

• Reading about the Financial Crisis: A Twenty-One-Book Review: There is no objective consensus regarding financial decision making, which makes it difficult to analyze financial events.
• The Death of Common Sense: How Elegant Theories Contributed to the 2008 Market Collapse: What role did modern portfolio theory play in the in the subprime mortgage crisis of 2008?
• The Case for Intervening in Bankers’ Pay: John Thanassoulis of Oxford University argues that implementing absolute bonus caps or forcing banks to pay fixed wages can be counterproductive, because bonuses are effectively a risk-sharing mechanism between bankers and their employers.
• Corporate Governance in the 2007–2008 Financial Crisis: Evidence from Financial Institutions Worldwide: During the 2007–08 financial crisis, firms with higher institutional ownership and more independent boards had worse stock performance than other firms.
• European Central Bank Policy-Making and the Financial Crisis: Researchers find evidence indicating a high level of objectivity in the ECB in its role as regional regulator as well as evidence of its strong ability to maintain price stability.
• What’s Wrong with Today’s Economics? The Current Crisis Calls for an Approach to Economics Rooted More on Data than on Rationality: Mainstream economics has undergone a significant shift over the past century from being categorized as a science based on empirical studies to being categorized as an analysis of deviations from an idealized economic scenario.
• The Death of Diversification Has Been Greatly Exaggerated: Diversifying across such factors as value and momentum is more effective than diversifying across such asset classes as global stocks and bonds.
• How to Make Finance Work: The US financial sector has grown much faster than the overall economy in the past three decades. That growth is beneficial, but the sector is also facing problems.
• Regulators Should Keep It Simple: Sebastian Mallaby summarizes a recent debate about the type and quantity of data that financial regulators should seek.
• The Storm after the Calm: The geopolitical and economic factors that shaped capital market returns in the previous century might be changing.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.