Abstract
The article briefly outlines how the two major structural causes of the financial crisis have been a massive underestimation of the negative externalities potentially arising from malfunctioning of financial markets, and the policy decision to assign the production of an eminently public good, financial stability, to private parties. Both ideas have been a tenet of the so-called Greenspan doctrine. The crisis also shows that all regulators tend to be captured in the end, and thus any new legislation should contain bright-line rules, that might look inefficient when assessed with reference to the market they regulate, but are socially efficient, because it would be politically costly to alter them. Criminal sanctions, which after all are a social form of regulation, should also be strengthened.
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Notes
As new papers are published on a daily basis, it is difficult to provide here with a brief list of references. For an historical perspective, the papers presented in Banca d’Italia (2009) are, however, particularly useful, and on www.voxeu.org readers may find brief and up-to-date comments by authoritative European and American economists.
Akerlof (1970).
As quoted by The Wall Street Journal, 17 February 2009.
BIS (1986).
Dodd (2008).
Greenspan (2004), emphasis added.
Kuttner (2007).
References
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