The financial crisis: imperfect markets and imperfect regulation

Richard J. Buttimer (Department of Finance, Belk College of Business, UNC Charlotte, Charlotte, North Carolina, USA)

Journal of Financial Economic Policy

ISSN: 1757-6385

Publication date: 12 April 2011

Abstract

Purpose

This paper seeks to examine the role that regulation and regulatory agencies played in the creating of the subprime mortgage market, and the subsequent crash of the mortgage market. The paper has two goals. First, it seeks to document the degree to which the US housing markets, and the US housing finance market, were regulated prior to the crash. Second, it seeks to show that regulatory bodies set policies which created both incentives and explicit requirements for Fannie Mae and Freddie Mac, as well as depository institutions, to enter the subprime market.

Design/methodology/approach

The paper examines the regulatory environment of the subprime market. It uses regulatory filings and other documents as primary sources.

Findings

The popular perception that the subprime mortgage market arose because housing finance was largely unregulated is incorrect. In point of fact, the housing finance market was very heavily regulated. Indeed, the paper shows that the creation of the subprime market was a formal goal of the federal government, and that federal regulatory agencies explicitly required participation by the Government Sponsored Enterprises (GSEs).

Originality/value

The paper's primary implication is that incentive conflicts within the US housing finance system significantly contributed to the mortgage crisis. These incentive conflicts were not just within private firms, but also extend to the GSEs and regulatory agencies. Regulatory agencies not only failed to anticipate the crisis; they actively encouraged the policies which created it. As a result, the primary focus of reform efforts should be on identifying and eliminating such conflicts.

Keywords

Citation

Buttimer, R. (2011), "The financial crisis: imperfect markets and imperfect regulation", Journal of Financial Economic Policy, Vol. 3 No. 1, pp. 12-32. https://doi.org/10.1108/17576381111116795

Download as .RIS

Publisher

:

Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited

Please note you might not have access to this content

You may be able to access this content by login via Shibboleth, Open Athens or with your Emerald account.
If you would like to contact us about accessing this content, click the button and fill out the form.
To rent this content from Deepdyve, please click the button.