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Across the Great Divide. New Perspectives on the Financial by John B. Taylor

By John B. Taylor

The monetary trouble of 2008 devastated the yankee economic climate and brought on U.S. policymakers to reconsider their ways to significant monetary crises. greater than 5 years have handed because the cave in of Lehman Brothers, yet questions nonetheless persist in regards to the top how one can stay away from and reply to destiny monetary crises. In Across the good Divide, a copublication with Brookings establishment, contributing monetary and felony students from academia, undefined, and govt research the monetary concern of 2008, from its explanations and results at the U.S. economic system to the best way forward. The specialist participants reflect on postcrisis regulatory coverage reforms and rising monetary and monetary tendencies, together with the jobs performed by way of hugely accommodative financial coverage, securitization run amok, government-sponsored corporations (GSEs), huge asset bubbles, over the top leverage, and the Federal cash fee, between different strength explanations. They speak about the function performed through the Federal Reserve and look at the...

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Example text

Though increased regulatory vigilance and skepticism are welcome, there has been too little focus on writing strong, simple rules that are difficult to game and easy to understand, implement, and enforce, and too much reliance on “stress testing” which, while helpful, is a discretionary process heavily reliant on supervisory judgment. Bank capital rules are a good example, where the regulators continue to rely on highly complex, model-driven formulas which have little, if any, credibility in the market place, especially when there are simpler, readily available alternatives such as strengthened leverage ratios and standardized risk weights.

They remind the reader of the positive feedback loop created in the housing market in the years leading up to the 2008 crisis and suggest that financial asset prices and recent Fed actions raise serious questions about the stability of the market as a whole and the possibility of future bubbles. The authors point to the role securitization played in the housing bubble and note that the securitization model was a response to the 1980s savings and loan crisis. They go on to describe the regulatory policy changes that were borne of the failed self-correcting approach to markets, enforcement, and oversight.

It may be bad for the lawyers, consultants, and compliance professionals who profit from complexity, but it would be far better for the rest of us. Solve the underlying problem (and, even then, remain alert). 21 Moreover, once a policy is implemented, few things have proven more dangerous than overconfidence. Throughout the crisis we saw markets—and regulators—take steps that they thought were responsible and risk-reducing that turned out to be massively risk-enhancing. Some of these problems (like too-big-to-fail) are particularly difficult to eliminate over time.

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