The article “Crash Course: The Origins of the Financial Crisis” published September 7, 2013 in The Economist describes the events that led to the Great Financial Crisis of 2007 and the resulting years of recession.

The main points of this article were that the origins of the Financial Crisis of 2007 were in the complacency of the Great Moderation which led to the pursuit of higher risks and returns, resulting in a financial meltdown when risk far surpassed that which was sustainable for credit agencies to give and for banks to underwrite.

In the “Great Moderation” there were many years of growth, low interest and low inflation. This made it more difficult to profit from investment, and many were determined to take bigger risks to get higher returns. European investment was borrowing from American markets. The risk was, however, too great and the Great Moderation ended suddenly with a termination of trust, lending and ever deflating asset values.

Credit agencies contributed to the crisis through irresponsible lending to subprime borrowers with risky credit histories and low incomes. Such securities were pooled to reduce risk, but it only served to aggregate the many high risk loans. The agencies were beholden to the banks that created the pooled subprime mortgages. When a housing bubble burst in the US in 2006 and the asset value shrank against the outstanding mortgage, the risk surpasses sustainable levels.

Credit agencies failed to note the fragilities that this was creating in the financial system. The pooling method did not provide protection from loss of asset value, and many securities became worthless. This impacted lending, as trust in securities was lost and the asset value of capital had dropped. Another major impact was the loss of capital value for banks, who suddenly realized they had too little capital backing to operate.

At the very end of the twentieth century banks were allowed to use their own risk assessment models, allowing them to set their own capital requirements. The context of investment and banking was focused on increased risk for increased returns. The risks were under-assessed, and banks were not able to underwrite the failed loans. Banks had no choice but to withhold credit. This had a great impact on economic demand. Regulators could have stepped in at this time, and stopped the widespread downward spiral of prices as demand further contracted. In the case of mortgages, with the dramatic drop in the housing prices due to the drop in demand, the house worth less than the mortgage outstanding.

Central banks and regulators were to blame for their failure to exercise oversight of financial institutions and to deal with the large deficit and capital inflows from Asia’s savings glut and Europe’s risky securities.

The Government should have saved the Lehman Brothers. It was the first in a chain of events that caused the seizure of the economy. Their bankruptcy multiplied panic in markets. No one would lend due to a lack of trust. This spread rapidly through to non-financial sectors. Allowing Lehman’s bankruptcy had the result of financial panic which brought down more companies in a chain reaction, including AIG, an American insurance giant.

In Acharya and associates’ paper “The financial crisis of 2007‐2009: Causes and remedies.” there is no fundamental disagreement with regard to events, but a different framework and point of reference are used. The first in the series of those events is seen to be the collapse of the Bear-Stearns hedge funds which caused the value loss on the property market. The framework used is the syndrome of a credit boom, asset bubble, price shock and bust.

Had banks and credit agencies been subject to tighter restrictions on credit and lending based on more sustainable risk by regulators, the Financial Crisis might never have occurred as the risky lending would not have been allowed.