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Proposals for Effectively Regulating the U.S. Financial System to Avoid Yet Another Meltdown

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  • James Crotty

    ()
    (University of Massachusetts Amherst)

  • Gerald Epstein

    ()
    (University of Massachusetts Amherst and Political Economy Research Institute (PERI))

Abstract

It is now clear that we are in the midst of the worst financial crisis since the Great Depression. This crisis is the latest phase of the evolution of financial markets under the radical financial deregulation process that began in the late 1970s. This evolution has taken the form of cycles in which deregulation accompanied by rapid financial innovation stimulates powerful financial booms that end in crises. Governments respond to crises with bailouts that allow new expansions to begin. As a result, financial markets have become ever large and financial crises have become more threatening to society, which forces governments to enact ever larger bailouts. This process culminated in the current global financial crisis, which is so deep rooted that even unprecedented interventions by affected governments have thus far failed to contain it. In this paper we first analyze a series of structural flaws in the current financial system that helped bring on the current crisis, and then propose a nine point regulation policy, informed by our analysis, designed to end this destructive dynamic. We believe that if enacted and vigorously enforced, the policy could sharply reduce financial instability and minimize the problems caused by future financial cycles. JEL Categories:

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Paper provided by University of Massachusetts Amherst, Department of Economics in its series UMASS Amherst Economics Working Papers with number 2008-15.

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Date of creation: Oct 2008
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Handle: RePEc:ums:papers:2008-15

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  1. L. Randall Wray, 2008. "Lessons from the Subprime Meltdown," Challenge, M.E. Sharpe, Inc., vol. 51(2), pages 40-68, March.
  2. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity, monetary policy, and financial cycles," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 14(Jan).
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Cited by:
  1. Argandoña, Antonio, 2009. "Can corporate social responsibility help us understand the credit crisis?," IESE Research Papers D/790, IESE Business School.
  2. Argandoña, Antonio, 2012. "Three ethical dimensions of the financial crisis," IESE Research Papers D/944, IESE Business School.
  3. Özlem Onaran, 2009. "From the Crisis of Distribution to the Distribution of the Costs of the Crisis: What Can We Learn from Previous Crises about the Effects of the Financial Crisis on Labor Share?," Working Papers wp195, Political Economy Research Institute, University of Massachusetts at Amherst.

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