By Ricardo A. Halperin
This publication examines the function of uncertainty on monetary judgements - and, as a result, on monetary markets - within the buildup to and aftermath of the good Recession. It tracks the numerous progress and critical structural adjustments within the monetary area in the past few many years, either one of which made the financial system extra liable to perceptions of chance within the markets. Halperin argues that traditional financial versions have misplaced relevance via failing to take those advancements under consideration effectively, and likewise explains that due to monetary globalization we will be able to now not comprehend what occurs within the economies of significant nations by means of counting on "closed-economy" considering. The booklet concludes with an inventory of coverage techniques designed to extend the resilience of the monetary markets to damaging monetary advancements and to minimize incentives for probability taking, together with an offer to put off the double taxation of dividends.
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Additional resources for The Influence of Uncertainty in a Changing Financial Environment: An Inquiry into the Root Causes of the Great Recession of 2007-2008
31. Feldstein. 45. ). Though these figures should be read with caution as they are based on estimates derived from limited data, they illustrate the damage potential of disruptions in the derivatives markets. 33. The fall of MF Global in November 2011 was the direct result of its exposure to the losing side in the derivatives contracts it held on European government bonds. No wonder that as early as 2003, Warren Buffet had referred to derivatives as “financial weapons of mass destruction”. 34.
38. However, end it did, sometime in 2006, and that was the trigger that eventually resulted in the financial crisis. Starting in 2007, real estate prices fell every year until 2012, when they started to recover. The rigid separation established by Glass‑Steagall had already started to be eroded as early as 1986, when the Federal Reserve allowed commercial banks to derive up to 5% of their revenues from investment activities. A few years later, the percentage allowed became 10, and in 1996 it rose to 25.
However, Berle and Means had already warned us in the 1930s that this assumption is no longer fully valid, due to the separation between ownership and control that took place in the nineteenth and twentieth centuries. The potential for conflicts of interests between owners and managers needs to be taken into account to interpret the decisions of firms and when formulating policies designed to influence their behavior. The disruptive behavior of Wall Street during the years preceding the 2007–2008 recession highlights how the system of manager’ remuneration in the financial sector resulted in short-sighted decision making, which was one of the factors that led to the subsequent downturn.