fbpx Struggling to Escape from 'Assumption 14' | Harvard Kennedy School

Additional Authors:

  • Benjamin Friedman


Struggling to Escape from 'Assumption 14.' Benjamin Friedman, May 1, 2011, Book Chapter. “At least four hypotheses, none mutually exclusive, have emerged to explain the origins of the financial crisis that began in the United States in 2007: (1) Managers of financial institutions, or their employees, may have engaged in criminal activity. (2) Principal/agent conflicts may have given the managers of financial institutions incentives to undertake activities that, though legal, nonetheless exposed their institutions and their shareholders to excessive risk that the shareholders would not have chosen. (3) The operation of government in a variety of ways – ranging from specific lender-of-last-resort actions and policies fostering homebuilding and home ownership to matters as general as limited liability – may have given both managers and shareholders incentives to put their institutions, and ultimately the taxpayers and the economy, at excessive risk. (4) Participants in the relevant financial markets, especially including mortgage borrowers, originators, securitizers and investors, may not have understood the risks inherent in the positions they and their institutions were taking …” Link