Banks issued subprime mortgages prior to 2007 due to perverse incentives and moral hazard
Evidence from financial crisis literature strongly supports the conclusion that structural flaws, perverse incentives, and moral hazard drove banks to issue subprime mortgages prior to 2007.
Papers [0] and [2] directly address the mechanisms behind the 2008 financial crisis, explicitly highlighting how moral hazard and perverse incentives led institutions and managers to issue and invest in subprime mortgages while offloading the risk onto others. The remaining papers discuss tangential topics such as urban development, pandemic household behavior, and international currency dynamics without refuting the claim.
N. Murray, A. Manrai, Lalita A. Manrai. The Financial Services Industry and Society: The Role of Incentives/Punishments, Moral Hazard, and Conflicts of Interests in the 2008 Financial Crisis. 2017. https://doi.org/10.1108/JEFAS-02-2017-0027
Paper [0] identifies inappropriate incentives, moral hazard, and conflicts of interest as structural flaws in the securitization chain leading up to the 2008 financial crisis.
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Garrett L. Brady, H. Kakkar, N. Sivanathan. Perilous and unaccountable: The positive relationship between dominance and moral hazard behaviors.. 2024. https://doi.org/10.1037/pspi0000448
Paper [2] notes that decision-makers engaged in moral hazard behaviors by prioritizing self-interest while shifting associated risks, directly citing the 2008 financial crisis and subprime mortgage investments.
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