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Video: The financial crisis explained

October 08, 2008

As a national leader in cross-disciplinary legal education, Penn Law is uniquely positioned to help our community understand what has caused the current economic problems and how they may continue to evolve and be solved. 

At an Oct. 3 “teach-in”, Law and Wharton Professors Tom Baker, Jill Fisch, David Skeel, Susan Wachter and Richard Herring explored the intellectual, philosophical and regulatory underpinnings of the economic crisis–and potential solutions.

While introducing the program, Law School Dean Michael Fitts recalled a scene in the classic movie It’s a Wonderful Life, when Jimmy Stewart’s character convinces his neighbors to not take their money out of the troubled savings and loan, because doing so would make matters worse.

“He has the intellectual insight, and instills confidence in everyone, and saves the day,” Fitts said, describing the panel he was introducing as “academic modern-day Jimmy Stewarts.”

Among the points raised during the discussion:

  • The financial upheaval was in some ways predictable and inevitable, with its origins reaching back to the Asian financial crises in the 1990s  and the savings and loan debacle in the 1980s.  The crisis is a case of market and regulatory failure; there was increased risk taking without accountability.
  • Bad loans were both a cause and a consequence of the problem. As banks sold pieces of their mortgage holdings to other investors in ever more creative ways, these bundled investments of collateralized debt obligations depended on the strength of the housing market.
  • The current bailout shows no signs of creating regulatory reform to address the underlying causes and may end up subsidizing some firms that do not need it and ignoring others that do , while rewarding imprudent investors.