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Financial Crises, Safety Nets, and Regulation

  • Michele Fratianni

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

The historical record shows that financial crises are far from being a rare a phenomenon; they occur often enough to be considered part of the workings of finance capitalism. While there is no single hypothesis that can best explain all crises, the implications of the credit boom-and-bust hypothesis, supplemented with asymmetric information, are consistent with the onset and development of many crises, including the current subprime crisis. Governments have reacted to crises by erecting a vast and growing safety net. In turn, to minimize their risk exposure, they have also put in place expansive systems of regulation and supervision. The unwinding of the current crisis will mark a big enlargement of the safety net and moral hazard, as well as a predictable flurry of policy proposals aimed at closing past regulatory loopholes. The maintained hypothesis is that regulatory and market failures are inexorably intertwined.

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File URL: http://kelley.iu.edu/riharbau/RePEc/iuk/wpaper/bepp2008-08-fratianni.pdf
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Paper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number 2008-08.

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Date of creation: Nov 2008
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Handle: RePEc:iuk:wpaper:2008-08
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