We Still Do Not Know What Caused The 2008 World-wide Financial Crisis

From "What do we know about the causes of the crisis?" by Andrew K. Rose and Mark M. Spiegel, 2 August 2010, on VOX:

In our earlier research on early warning systems (Rose and Spiegel 2010b and 2010c), we found that it was difficult to reliably link macroeconomic or financial indicators from 2006 or earlier to a variety of financial and real manifestations of the 2008 crisis. Our more recent research corroborates our scepticism. Despite a broad search, we have been unable to find consistent strong linkages between pre-existing variables that are plausible causes of the Great Recession and the actual intensity of the recession.

It is natural for economists to generalise from experiences of a few particularly salient countries to make generalisations, though it is often inappropriate. Our poor results are simply telling us that the pre-conditions for the crisis in the US (or Iceland, or Latvia …) often do not describe other countries particularly well. Credit growth was high before 2008 in Australia, Canada, and South Africa, yet these countries seemed to have weathered the crisis well. Real housing prices actually fell in Japan, Germany and Portugal, yet these countries were hard hit. Since it is difficult to understand the cross-country incidence of the great recession even in retrospect, we are dubious about the potential for a comparable early warning forecasting model going forward.

Read the complete post here.

Without knowing the causes of the 2008 financial crisis, the Dodd-Frank financial reform law will not prevent the next crisis.

Without knowing the causes of the 2008 financial crisis, random and political government policies, such as stabilizing home prices, are unlikely to return the US to a pre-crisis level of output and employment.