Fair Value Accounting and Financial Crisis

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5. Fundamental reason for the failure of the financial systems and economic recession a. Specific government actions & intervention – Excessive money policy Current monetary policy contributed in a certain extent to the failure of financial systems and economic recession. For example, U.S. monetary policy since 2002 was too expansionary (Taylor 2009) and was a major culprit to the crisis (Jeroen 2010). The policy makers was also lack of accountability that fail to encourage optimism about the reforming the policy process itself (Adrian & Atkinson 2009). The decision by the U.S. Treasury and the Fed to let a major bank (Lehman Brothers) fail led to a system-wide loss of confidence that exacerbated the crisis. The failure of policy makers to deal with the crisis should be seen as a factor in aggravating the crisis. (1) Housing market failure - An Economics professor Taylor conducted a research in 2009 and suggested that the financial crisis was due to government policy and intervention that leaded to excessive money and contributed to housing boom and bust (Taylor 2009). By using the information given in The Economist (October 18, 2007), Taylor indicated that the federal funds interest rate was deviated from the suggested rate based on Taylor Rule – Fed interest rate should be adjusted according to economic situations such as the inflation & employment level. The actual rate was far below the suggested rate from 2001 to 2006 (Please refer to Figure 2), so it suggested that the monetary policy was too loose. In order to prove that abnormal interest rate contributed to housing marketing failure, Taylor decided to implement the following model to indicate that if the suggested rate (counterfactual) was applied, fluctuations of hou... ... middle of paper ... ...? Harvard Business Review (November): 85-92. 22. Scott, I.E. (2009), “Fair Value Accounting Friends or Foe?” http://www.law.harvard.edu/programs/about/pifs/llm/select-papers-from-the-seminar-in-international-finance/llm-papers-2008_2009/scott.pdf, accessed February 4, 2011. 23. Sorrnette, D. and R. Woodard 2010. Financial Bubbles, Real Estate Bubbles, Derivative Bubbles, and the Financial and Economic Crisis. Econophysics Approaches to Large-Scale Business Data and Financial Crisis. Retrieved 5 March 2011 from SpringerLink 24. Taub, S. (2009). Survey: Boards are Often Blind to Major Risks, CFO Magazine. Available at http://www.cfo.com/article.cfm/12454618?f=search, accessed August 5, 2009. 25. Taylor, J.B. 2009. The Financial Crisis and the policy Responses: An Empirical Analysis of What Went Wrong. NBER Working Paper 14631. http://www.nber.org/papers/w14631.pdf
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