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All Fall Down

Debt, Deregulation and Financial Crises

Jane D’Arista

All Fall Down traces the ways in which changes in financial structure and regulation eroded monetary control and led to historically high levels of debt relative to GDP in both developed and emerging economies. Rising stocks of debt drove the global financial system into crisis in 2008 when households, businesses, financial institutions and the public sector in some countries strained to generate sufficient income for debt service. The stagnation and fall in asset prices that followed began the process of unwinding that led to a run on the financial sector by the financial sector.
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Chapter 5: An overview of financial restructuring and its consequences

Jane D’Arista

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The scale of intervention to shore up a collapsing financial system revealed the problems that had caused the crisis: the interconnectedness of institutions and markets; lack of transparency surrounding institutions, markets, financial activities, and assets; rising leverage and innovations that made institutions more profitable and added more risk. Particularly notable deregulatory actions that compounded these problems included the exemption of mortgage-backed securities from registration, the repeal of Glass-Steagall and authorization of multipurpose financial holding companies. Lack of oversight and failure to acknowledge the changes brought about by pro-cyclical market forces left regulatory authorities unprepared and groping for ways to make the systemic response required when AIG and Lehman Brothers began to fail. They had ignored the dissolution of the old system without creating a coherent framework of regulation and oversight for the system that replaced it.

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