The recent credit crisis arising from the collapse of the subprime mortgage market had a large impact on the world economy. At the time of writing, some worry that the debt crisis in the Euro zone could have a similar impact. The causes of both these crises had been building up for years, if not decades, yet few recognized the warning signs. This raises a number of questions:
1. Were the recent crises predictable? If so, what were the warning signs?
2. Why did so few predict them? Was this a failure of economists, bankers, politicians, or all of the above?
3. What could have been done to prevent them? What should we be doing to prevent future crises?
We will try to answer these questions by:
• Making sure we understand what exactly happened
• Exploring and testing various theoretical explanations of the crises
• Analyzing historical examples of financial crises
• Discussing policy options for the future