Why the Global Financial Crisis is bound to be repeated

The crisis originated in the US insurance, banking, and real estate sectors but the fallout threatened everyone, from powerful institutional investors to members of the public going about their daily business. When the stakes are so high, a thorough understanding of the causes of such a momentous crisis could be vital but even that may not be enough to stop a repeat.

In his paper The Great Game Will Never End: Why the Global Financial Crisis Is Bound to Be Repeated, Professor David Blake of Bayes Business School re-examines the key explanations for why the fInancial crisis of 2008 occurred. He finds a common underlying cause, namely gaming by personnel at all levels in the banking sector and its regulators. This enabled banks to use highly leveraged, maturity-mismatched investment strategies, designed so that the banks retained the upside rewards, but transferred the downside risks to taxpayers. Profits were privatised, and losses socialised.

This finding has not been fully explored in earlier studies of the financial crisis. Although governments have introduced some significant mitigatory measures, they will not be effective in preventing future financial crises, because they do not and, indeed, cannot provide the appropriate incentives to end the Great Game bankers play, which would involve making them, rather than taxpayers, personally liable for losses. A new global crisis, therefore, may only be a matter of time.

The Great Game Will Never End: Why the Global Financial Crisis Is Bound to Be Repeated is available for download at City Research Online.

It has been published in Journal of Risk and Financial Management.