The financial crisis in the summer of 2007 should have come as no surprise. Short-termism and balance-sheet myopia had become endemic with the spread of the market-value delusion in the form of fair-value accounting. The dangers had been signalled well in advance:

It can lead to a misallocation of resources and sub-optimal investment behaviour because, in an economic upturn, non-viable projects may get financed, while in a downturn even very promising projects may be rejected. In addition, systemic risk could increase, an illustration being the fuelling of an asset bubble during economic upturns through generous credit conditions and higher collateral values. The subsequent bursting of the bubble may result in a banking crisis and a credit crunch.

[European Central Bank, Monthly Bulletin, February 2004, p.78]


Monetary Policy Moral Hazard Downside Risk Banking Crisis Banking Supervision 
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© Robert Anthony Rayman 2013

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