Towards a Better Financial System

Towards a Better Financial System

January 2019Working Paper No. 3765

A healthy and stable financial system enables efficient resource allocation and risk sharing. A reckless and distorted system, however, causes enormous harm. The cycles of boom, bust, and crisis that repeatedly plague banking and finance are symptoms of deep governance and policy failures. Reinhart and Rogoff (2009), who studied financial crises over many years and jurisdictions, conclude that crises are preventable but that governments are themselves part of the problem, either because they mishandle their own finances and borrow too much, or they fail to prevent recklessness by households and firms.