The subprime mortgage crisis already ranks among the most serious economic events affecting the United States (US) since the Great Depression of the 1930s. This study analyzes the key issues raised by the crisis. These issues are fundamental to risk bearing, sharing, and transfer in financial markets and institutions around the world. The hope is that the analysis in this paper will facilitate the design of new and efficient policies to mitigate the costs of the current crisis and to reduce the likelihood and costs of similar future events.
The paper has been prepared for the Commission on Growth and Development, which was initiated in 2006 to explore the most effective approaches to stimulate growth in developing countries, and is sponsored by various governments, foundations, and the World Bank. Many of the issues raised by the US subprime crisis are particularly important for high-risk loan markets in developing countries; after all, most borrowers in these countries are subprime. The lessons learned from the crisis can thus play an important role in the growth and development of emerging economies for decades to come.
Because the causes, propagation mechanisms, and results of the subprime mortgage crisis are themselves highly complex, an analytic framework is essential if the discussion is to proceed in a cohesive fashion. The framework applied in this paper analyzes subprime mortgage lending as a major financial market innovation. Section 2 briefly describes the innovation process and its connection to the subprime mortgage crisis. Section 3 provides an annotated list of issues raised and lessons learned, in effect an executive summary. Sections 4 to 6 provide the more detailed analyses that underlie the listed issues and lessons. Section 7 provides brief concluding comments.
Download
The U.S. Subprime Mortgage Crisis: Issues Raised and Lessons Learned
