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The global economy has entered what appears to be a very serious financial crisis for reasons other than force majeure. While the current focus has to be on preventing a repeat of the Great Depression, efforts must also be made to understand why the crisis came about in the first place. The objective of this paper is to demonstrate that the regulators should have known what the risks were and that these risks were large and systemic, and should have concluded that actions were required to prevent a serious global crisis.

The article analyzes the developments in the US mortgage market to assess whether the chances of a crisis in the period before the crisis could have been assessed to be too remote to warrant concern.

The evidence seems quite clear that, given the assessments of potential consequences of previous episodes in which concerted actions had to be taken to prevent the collapse of the global financial system, the regulators of the US economy should have taken steps long before the onslaught of chains of collapse of financial institutions that began in the summer of 2007.

It is hoped that analysis such as this will lead to improvement of regulations of financial markets, reducing chances of future crises of such proportions.

Political risk should be seen as arising from renegotiation of implicit or explicit contract under which foreign investors enter a host country. Governments will legitimately enter into renegotiation to increase the share of rents earned by the society. Corrupt political leaders, however, will use their powers to extract rents from foreign investors for personal gains rather than for the good of the society. Political risk assessment, therefore, should assess the intentions of government as well as the strengths of political and social institutions that keep leaders under control. Firms should also understand that their own actions may contribute to creating political risk.