The author measures the cost of the financial crisis in several basic and incomplete ways, using such metrics as market capitalization, world GDP, US household wealth, financial sector write-downs, central bank balance sheets, US government responses, and reduced economic output. He compares those results with the size of US residential mortgage losses and concludes that mortgage losses are insufficient to explain the full magnitude of the financial crisis.

In search of the causes of the crisis, the author summarizes several estimates of US mortgage losses and provides his own estimate using a top-down approach derived from the usual frequency of default and loss given default measures. He also briefly reviews the Financial Crisis Inquiry Commission (FCIC) report.

The author suggests that several things that occurred in the years leading up to the crisis are the deeper causes of the crisis. First, he argues that when securities firms converted from partnerships to corporations, the separation of owners and managers created a classic principal–agent problem, which, in turn, encouraged excessive risk taking because employees’ downside is limited. Second, deregulation (recognized as a “failure” by the FCIC report) removed some key safeguards and relied on the industry to self-regulate. Third, false confidence in complex quantitative models resulted in insufficient risk management.

All three of these factors led to increased risk-taking behavior across the industry, spreading to even the most conservative financial institutions, lured by higher profit margins and compensation. Lastly, globalization amplified the magnitude of high leverage and the strong risk appetite. With advanced telecommunication tools and in the absence of capital control, financial professionals across the globe pursued similar strategies and were vulnerable to the same risks.

The author argues that these factors are the deeper causes of the crisis and adds the following as relevant issues: excess liquidity and the hunt for yield, fair-value accounting and the related markdowns, shadow banking, securitization, derivatives, and greed.

The author’s work prompts readers to search for risks lurking in places that are not traditionally explored. He implies that risk building up within a system may take a long time, to the extent that it may surprise the industry when the risk eventually manifests itself. But the author does not provide practical tools to identify the risk ex ante.

This work may be of particular interest to economists or practitioners in real estate or mortgage investments.

The first part of the article with the argument that mortgage loss is substantially less than the total loss is a moot point. The crisis at its core was similar to a bank run; when confidence and ability to repay is in doubt, a liquidity crisis ensues. The credit loss on mortgage loans was a trigger, and the resulting “run” was more damaging than the initial loss, regardless of the existence of “deeper causes.” The article offers a multiplicity of perspectives on factors concurrent to the financial crisis, although no formal causality is established. In reality, the factors were intertwined, and it would be almost impossible to pinpoint the specific factors that were responsible.