Edited by Christopher J. Green, Eric J. Pentecost and Tom Weyman-Jones
Chapter 11: The World of Unintended Consequences: A Post-Mortem on Regulation Q and Prologue for the Future
Robert A. Eisenbeis and George G. Kaufman INTRODUCTION The US and world financial systems are in the midst of what is widely perceived as the worst financial crisis since the Great Depression of the 1930s. Like other financial crises, it has ignited an adverse feedback loop to the real economy, causing serious declines in real income and employment.1 Because of their great costs, major financial crises tend to be quickly followed by proposals to reform the financial system to ensure that whatever happened ‘never happens again’. The current crisis is no exception. It has exposed widespread breakdowns in corporate governance of financial institutions, managerial failures in financial institutions, and supervisory failures by the responsible banking and financial institution regulatory agencies. As a result, the focus of much of the immediate regulatory reform proposals is likely to be on ‘fixing’ how institutions and the regulatory agencies conduct their business once the crisis has passed. In addition, there are likely to be efforts to expand the types of financial institutions that will be subject to government regulation and supervision, and to regulate both the types of financial products and the terms under which they are offered to the public. Experience has shown, however, that the middle of a crisis or immediately afterwards are the worst times to attempt to address financial and regulatory reform issues efficiently. The true causes of the crisis are likely to be not yet well understood. As a result, the reforms enacted are usually poorly motivated and not...
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