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Too Big to Save?

How to Fix the U.S. Financial System

Robert Pozen
Wiley, 2009
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Editorial Rating

9

Qualities

  • Controversial
  • Innovative
  • Eye Opening

Recommendation

Stable, sustainable economic growth requires new approaches to financial regulation. In this insightful book, Robert Pozen explains how speculative securities underwriting, easy mortgage financing and poor regulation led to the worst U.S. recession since the 1930s, as well as a worldwide financial crisis. An industry leader in investment management, Pozen proposes regulatory reforms to make the financial system less vulnerable to similar problems in the future. Readers may disagree with some of Pozen’s recommendations, and as the U.S. government adjusts its regulation of financial institutions, some of his proposals may become moot. However, his accessible, informed text also offers a remarkably clear account of how the recession unfolded in the United States. That’s more than enough reason for getAbstract to recommend this intelligent book to anyone interested in global financial fragility and how to fix it.

Summary

The Subprime Roots of the Recession

Mortgage foreclosures led the United States into a deep recession in late 2007, primarily due to risky lending and lax regulation. This set the stage for a global financial panic in late 2008. The financial crisis began to take shape as home loans to subprime borrowers and the sale of securities backed by such loans multiplied while housing prices soared. Then mortgage foreclosures surged, housing prices slumped, consumer spending slowed, recession emerged and economic growth stopped. How did this happen?

The Federal Reserve contributed to unsustainable growth in housing by keeping interest rates too low for too long. The Fed kept short-term rates low from 2002 until 2006, well after the housing boom had begun. These low rates encouraged excessive mortgage financing and refinancing. Many mortgage lenders provided subprime loans with low initial monthly payments and set adjustable interest rates linked to yields on short-term U.S. Treasury securities.

For lenders, finding underwriting money was relatively easy. They raised cash for subprime mortgage lending by selling their loans instead of keeping them, so their revenue came...

About the Author

Robert Pozen is chairman of MFS Investment Management. He is a senior lecturer at the Harvard Business School. Pozen chaired a committee on financial reporting improvements that advised the Securities and Exchange Commission in 2007 and 2008.

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