The Panic of 2008

The Panic of 2008

Causes, Consequences and Implications for Reform

Edited by Lawrence E. Mitchell and Arthur E. Wilmarth, Jr

The Panic of 2008 brings together scholars from a variety of disciplines to examine the causes and consequences of the global credit crisis, the subsequent collapse of the financial markets, and the following recession. The book evaluates the crisis in historical context, explores its various legal, economic, and financial dimensions, and considers various possibilities for reform. The Panic of 2008 is one of the first in-depth efforts to study the crisis as it was in the very earliest stage of resolution, and establishes a foundation for thinking about and evaluating current reform efforts and the likelihood of recurrence.

Chapter 9: Regulating the Financial Markets by Examinations

Tamar Frankel

Subjects: economics and finance, financial economics and regulation, law - academic, finance and banking law


Tamar Frankel SUMMARY This chapter proposes changing future government examinations of market intermediaries and focusing on bubbles and crashes as the main dangers to the financial system and the economy. Prior substantive regulation has an undesirable effect on innovations and freedom of the markets. Regulating after a crash (when the ‘horse has left the barn’) is undesirable and ineffective. Therefore the chapter proposes tighter and closer examinations somewhat different from the current ones: (1) Examine more frequently when market prices rise (not when they have fallen). (2) Examine entities that are too large to fail; those that are highly leveraged; those whose shares-prices rise steadily with little or no fluctuation; and entities that have obtained exemptions from regulation. (3) Examiners should search for violations of the law (and the spirit of the law), but not economic or financial rationalizations. (4) Examiners should be experts, highly paid and incentivized to remain in government employ. Expert information about the markets will hopefully reduce the impact of bubbles and inevitable crashes and the loss of investors trust that decimates the financial system. INTRODUCTION It is time to reevaluate the regulation of the financial markets. This reevaluation should include the fundamental regulatory philosophy and its implementation. For the past 60 years two principles guided market regulation. One principle was disclosure by securities issuers to investors. The second principle underlying market regulation was self-regulation by the financial intermediaries, subject to the supervision of the Securities and Exchange Commission (SEC). Added to these two principles were...

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