Rethinking Financial Regulation: How Confusion Has Prevented Progress

Rethinking Financial Regulation: How Confusion Has Prevented Progress

Progress and Confusion: The State of Macroeconomic Policy. Cambridge : MIT Press,
2016, Pages 61-72

The failure of financial regulation can, and did, cause significant harm to the economy. I argue that confusion about the nature of the problems in the financial system and about the trade-offs associated with key regulations has prevented progress in making the financial system safer and healthier. This system, little changed since the financial crisis, still endangers and distorts the economy unnecessarily.

In 2007–2009, a crisis that started in the US housing market had powerful ripple effects around the globe. These effects were largely the result of an increase in opacity and interconnectedness, which created powerful contagion mechanisms, transmitting…