The core policy dilemma in responding to the financial crisis through promulgation of new laws and regulations is that bad prior policy choices were core contributors to the crisis. In a very real sense, regulation got us into this mess, so why should we expect it to get us out. Arnold Kling has just published a report dealing with this issue.
The paper shows that broad policy areas—including housing policy, capital regulations for banks, industry structure and competition, autonomous financial innovation, and monetary policy—affected elements of this framework to varying, but important, degrees. While considering alternative points of view concerning the causes of the financial crisis, the paper concludes that bank capital regulations were the most important causal factor in the crisis and that the policy “solutions” to previous financial and economic crises sowed the seeds for this current crisis.
