Financial Stability: Fraud, Confidence, and the Wealth of Nations
From the very beginning of finance to the recent housing boom and bust, financial panics have been characterized by hidden leverage and bad debt. Losses embedded in the system have often been disguised by fraud on the part of private and public actors. Our panel will take a walk through financial history and describe a theory of financial stability derived from that history, as elaborated in Financial Stability: Fraud, Confidence, and the Wealth of Nations. Elements of this theory suggest that the rule of law, freedom, and transparency are critical ingredients for financial stability. Our panel will also examine how free markets can narrow credit spreads and stabilize equity markets, leading to greater overall financial stability.