What Made the Financial Crisis Systemic?
The current narrative regarding the 2008 systemic financial system collapse is that numerous seemingly unrelated events occurred in unregulated markets, requiring widespread bailouts of the financial system. The Financial Crisis Inquiry Commission, created by the U.S. Congress to investigate the causes of the crisis, promotes this politically convenient narrative, and the 2010 Dodd-Frank Act operationalizes it by extending federal protection and regulation of banking and finance to cover virtually all financial activities, including hedge funds and proprietary trading. Markets can become unbalanced, but they generally correct themselves before crises become systemic. Because of the accumulation of past political reactions to previous crises, this did not occur with the most recent crisis. Public enterprises had crowded out private enterprises, and public protection and the associated prudential regulation had trumped market discipline. Prudential regulation created moral hazard, and public protection invited mission regulation, both of which undermined prudential regulation itself and eventually led to systemic failure. Join us for a discussion of this issue with Kevin Villani, co-author of the new paper, "What Made the Financial Crisis Systemic?"