History, Politics and Economics
Edited by Joëlle Leclaire, Tae-Hee Jo and Jane Knodell
Chapter 1: Difficulties in Reregulation of the Financial System After the Crisis
1. Difficulties in reregulation of the financial system after the crisis Jan Kregel THREE STAGES OF THE CRISIS The current financial crisis can be characterized in three distinct stages. Each new stage of the crisis can be linked to a failure to apply existing regulations or a failure of regulation. This has opened the way to a response to the crisis that avoids structural reform of the financial system and instead focuses on more effective application of existing regulations or improvements in those regulations. As a result, despite widespread expectations that the severity of the crisis would lead to fundamental reform similar to that of the New Deal period, reregulation of the financial system has been minimal. After the increase in defaults and the reversal of house prices in 2006 led to the insolvency of several large mortgage originators such as New Century and Countrywide in the spring of 2007, attention was focused on the regulations governing mortgage lending. This was the stage in which the crisis was considered to have been ‘contained.’ Despite discussions of fraudulent lending and measures to rescue borrowers, little has been done in either respect. Losses were contained in the sense that they were primarily absorbed by the households who could no longer meet their payments on non-traditional mortgages. The bankruptcy judge dealing with New Century recommended that management be tried for fraud and required to repay bonuses that have been paid against fictitious profits generated by inaccurate and probably fraudulent bookkeeping practices. In December,...
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