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regulation and the financial crisis September 23, 2008

Posted by Bradley in : Uncategorized , trackback

Alongside the issue of what sort of bailout may be appropriate to stop the financial markets imploding (Richard Epstein argues that bad regulation isn’t the right answer), is the issue of how financial regulation should be amended to prevent such risks of implosion for the future. Dominique Strauss-Kahn of the IMF has written:

There is a deeper structural issue to be resolved. This crisis is the result of regulatory failure to guard against excessive risk-taking in the financial system, especially in the US. We must ensure it does not happen again. Work has started to rebuild the architecture and the leading industrialised countries have already put forward recommendations for better prudential regulation, accounting rules and transparency. The role of credit rating agencies will also need to be rethought, with greater public scrutiny. In a globalised world, these efforts will have to be broad-based if they are to be effective.

But this question of what sort of financial regulation we need is very complex. Part of AIG’s problem (part of the reason for the need to rescue AIG) was its exposure to credit default swaps, some of which were designed to help financial institutions limit their credit risks and reduce their needs for capital. Will we really be better off layering regulation of credit default swaps on top of all of the other regulations financial institutions are subject to, as New York is doing?


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