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Lessons from the Global Financial Crisis (Or Why Capital Structure Is Too Important to Be Left to Regulation)

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  • Brian Kantor
  • Christopher Holdsworth

Abstract

Given the likelihood of periodic financial crises, much of the focus of policymakers should be on the proper response to rather than the prevention of crises. In this article, the authors begin by repeating Walter Bagehot's famous prescription for resolving financial trouble in the 19thcentury London money market: flood the system with liquidity and do all that can be done to keep the capital markets open and functioning. Although this message was disastrously ignored by the Federal Reserve Bank of 1929-33, Bagehot's advice was well understood by the Fed and U.S. Treasury in managing the crisis of 2008. Copyright Copyright (c) 2010 Morgan Stanley.

Suggested Citation

  • Brian Kantor & Christopher Holdsworth, 2010. "Lessons from the Global Financial Crisis (Or Why Capital Structure Is Too Important to Be Left to Regulation)," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(3), pages 112-122.
  • Handle: RePEc:bla:jacrfn:v:22:y:2010:i:3:p:112-122
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    References listed on IDEAS

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    1. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    2. Hoi Ying Wong & Tsz Wang Choi, 2009. "Estimating default barriers from market information," Quantitative Finance, Taylor & Francis Journals, vol. 9(2), pages 187-196.
    3. Dionne, Georges & Laajimi, Sadok, 2012. "On the determinants of the implied default barrier," Journal of Empirical Finance, Elsevier, vol. 19(3), pages 395-408.
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