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The crisis of 2008 and financial reform

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  • Werner De Bondt
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    Abstract

    Purpose – The purpose of this paper is to discuss the financial turmoil of 2008 that followed the collapse of the housing bubble in the USA which was the starting point of a global economic crisis. Huge costs are borne by every part of society. Much wealth has been destroyed. Millions of jobs have been lost. The crisis has tarnished faith in free enterprise, in the financial system, and in financial theory. Likely, the era of laissez-faire capitalism that started during the Reagan-Thatcher years is ending. We are entering a period of profound uncertainty. It is imperative that the moral dimension of capitalism be restored. Design/methodology/approach – The paper is based on a review of theory and historical evidence relating to financial bubbles and financial regulation. Findings – The author offers suggestions on how to rebuild the global financial system. We need: a systemic risk regulator, independent from business and political influence; higher capital requirements for all systemically significant financial service firms; restrictions on proprietary trading in commercial banks; transparency in derivatives; new ways to compensate bankers that reduce the incentive to take excessive risks; consumer protection against defective financial products; and the re-establishment of the principle of fiduciary duty. Practical implications – The paper lists practical suggestions on how to reform the global financial system. Social implications – Economic success is based on trust. After the 2008 crisis, regulatory reform is the best way to rebuild trust in the financial system. Originality/value – The paper offers a unique perspective based in part on insights drawn from behavioral finance.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Qualitative Research in Financial Markets.

    Volume (Year): 2 (2010)
    Issue (Month): 3 (October)
    Pages: 137 - 156

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    Handle: RePEc:eme:qrfmpp:v:2:y:2010:i:3:p:137-156

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    Related research

    Keywords: Behavioural economics; Capitalist systems; Economic reform; Regulation; World economy;

    References

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    1. Charles W. Calomiris, 2006. "The Regulatory Record of the Greenspan Fed," American Economic Review, American Economic Association, vol. 96(2), pages 170-173, May.
    2. Alberto Alesina & Edward Glaeser & Bruce Sacerdote, 2001. "Why Doesn't The US Have a European-Style Welfare State?," Harvard Institute of Economic Research Working Papers 1933, Harvard - Institute of Economic Research.
    3. Posner, Richard A., 2010. "The Crisis of Capitalist Democracy," Economics Books, Harvard University Press, number 9780674062191.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
    5. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
    6. Calomiris,Charles W., 2006. "U.S. Bank Deregulation in Historical Perspective," Cambridge Books, Cambridge University Press, number 9780521028387.
    7. Saez, Emmanuel, 2009. "Striking it Richer: The Evolution of Top Incomes in the United States (Update with 2007 estimates)," Institute for Research on Labor and Employment, Working Paper Series qt8dp1f91x, Institute of Industrial Relations, UC Berkeley.
    8. George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
    9. John B. Taylor, 2009. "Getting Off Track - How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis," Books, Hoover Institution, Stanford University, number 3.
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    Cited by:
    1. Kornai, János, 2014. "Bevezetés A puha költségvetési korlát című kötethez
      [Introduction to the author s volume entitled Soft Budget Constraint]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 845-897.

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