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New Directions in Financial Services Regulation

New Directions in Financial Services Regulation

Roger B. Porter
Robert R. Glauber
Thomas J. Healey
Copyright Date: 2011
Published by: MIT Press
Pages: 240
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  • Book Info
    New Directions in Financial Services Regulation
    Book Description:

    The financial crisis of 2008 raised crucial questions regarding the effectiveness of the way the United States regulates financial markets. What caused the crisis? What regulatory changes are most needed and desirable? What regulatory structure will best implement the desired changes? This volume addresses those questions with contributions from an ideologically diverse group of scholars, policy makers, and practitioners, including Paul Volcker, John Taylor, Richard Posner, and R. Glenn Hubbard. New Directions in Financial Services Regulation grows out of a conference hosted by the Mossavar-Rahmani Center for Business and Government at Harvard's Kennedy School of Government in October 2009, and the book reflects the dynamic give-and-take of the event. Each part of the book includes not only major papers and presentations but also a summary of the subsequent discussion. The book achieves a balance of academic and practitioner perspectives, with leaders of financial firms and regulatory bodies offering insights based on their experiences in the financial crisis of the year before.

    eISBN: 978-0-262-29578-9
    Subjects: Economics, Finance

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface and Acknowledgments
    (pp. vii-x)
    Roger B. Porter, Robert R. Glauber and Thomas J. Healey
  4. Introduction: The Crisis of 2008 and Financial Services Regulation
    (pp. 1-10)
    Roger B. Porter

    Few events in recent decades have shaken the U.S. and global economy as much as the events of 2008—from the slowdown early in the year that prompted the first of what would become a series of stimulus measures to the demise of Bear Stearns to the sharp decline in real-estate prices to the bankruptcy of Lehman Brothers and the meltdown in financial markets.

    The impact on the U.S. economy alone proved staggering—net worth, at least on paper, declined from roughly $65.5 trillion to $51.5 trillion, a fall of $14 trillion when one includes the value of residential and...


    • Origins and Policy Implications of the Crisis
      (pp. 13-22)
      John B. Taylor

      I have been thinking and writing about the financial crisis and its origins since before the crisis flared up in 2007. My approach has been empirical. I have looked at the data carefully, used econometric techniques, and focused on the things that are amenable to economic analysis. This analytical process has led me to some strong conclusions. I first pulled these conclusions together into a full story in November 2008, when I was asked to deliver the keynote address at a conference honoring David Dodge, who was departing after serving for many years as the Governor of the Bank of...

    • Underlying Causes of the Financial Crisis of 2008–2009
      (pp. 23-74)
      Richard A. Posner

      Many factors contributed to the collapse of the banking (financial-intermediation) industry, which crescendoed in September 2008. Some of them I will not discuss simply because they are not, as a practical matter, remediable. These include the tax deductibility of mortgage and home-equity interest, the favorable capital-gains treatment of home resales, the favorable tax treatment of debt versus equity, limited liability of corporate shareholders, and profit—or, in the case of home buyers and other consumers, utility—maximization, which implies indifference to external costs.

      Causality is not something that is given, but rather is a matter of choice. For example, if...


    • The Morning After: A Road Map for Financial Regulatory Reform
      (pp. 77-98)
      R. Glenn Hubbard

      The conventional assessment of the present financial and economic crisis places blame on a dearth of regulation. That is simplistic at best, and entirely inaccurate at worst. The truth is that the financial crisis is the result of a lack ofeffectiveregulation.

      Several themes emerge from the crisis. First, we need more effective regulation. Although we need new regulation in some previously unregulated areas, the crisis has shown that the most precarious sectors of our financial system are those already subject to a great deal of regulation—regulation that has proved woefully ineffective. Any call to advance effective reform...

    • An Ounce of Prevention: Financial Regulation, Moral Hazard, and the End of ʺToo Big to Failʺ
      (pp. 99-134)
      David A. Moss

      The magnitude of the recent financial crisis reflects the failure of an economic and regulatory philosophy that was increasingly influential in policy circles over the past three decades. This philosophy, guided more by theory than historical experience, held that private financial institutions not insured by the government could be largely trusted to manage their own risks—to regulate themselves. The crisis has suggested otherwise, particularly insofar as several of the least regulated parts of the system (including non-bank mortgage originators and the major broker-dealer Bear Stearns) were among the first to run into trouble. Former Federal Reserve Chairman Alan Greenspan...


    • Regulatory Structure and Reform: The Purpose Should Guide the Outcome
      (pp. 137-154)
      David G. Nason

      The United States now seems to be emerging from a period of financial crisis marked by failure: failures in seemingly the most liquid of markets (notably the markets for money-market mutual funds, for asset-backed commercial paper, and for auction-rate securities) and failures of apparently stable and iconic financial institutions (two of the largest global investment banks, the worldʹs largest insurance company, the two government-sponsored housing enterprises, and some of the largest commercial banks). And there is yet another failure these events have forced policy makers to confront: the fact that regulators and regulations were not well positioned to adapt to...

    • Reengineering the Financial Regulatory System
      (pp. 155-196)
      James D. Cox

      ʺIt was the best of times, it was the worst of timesʺ is the opening line of one of the great literary works. Such equanimity is not likely to be expressed today about the American economy, or, for that matter, about the regulatory state that contributed so mightily to the credit crisis that grips the world. Recessions are not unusual. Moreover, financial crises seem to recur, and so we can mark each American financial crisis by identifying each of the many regulatory reforms enacted in response to each crisis. The Great Depression ushered in the New Deal, and with it...

    • Concluding Remarks by Thomas J. Healey
      (pp. 197-200)

      We would like to thank you all for your thoughtfulness, openness, and spirit. From our point of view, this conference has been everything we hoped and more. Our discussion of congressional oversight reminded me of when Paul Volcker was chairman of the Federal Reserve in the mid 1980s. When it came time to give his semi-annual Humphrey-Hawkins testimony before Congress, he would dutifully sit in the House of Representatives and proceed to mumble his way through the testimony. This caused such great consternation, as you can imagine, that they hired the worldʹs greatest acoustic expert to come in and set...

    • Keynote Address by Paul A. Volcker: The Financial Crisis in Perspective
      (pp. 201-216)

      I have the pleasant task of introducing Paul Volcker. For most people Paul needs no introduction. He has had a long and distinguished career in financial public policy. In the minds of most all of us, he stands among the very smallest group of outstanding public servants in financial regulation and policy in the last half-century, defined by his wisdom, integrity, and willingness to say and do tough things. Around here, of course, we are particularly proud to say that he is a graduate of the Littauer Graduate School of Public Administration, the predecessor institution of the Kennedy School. I...

  8. References
    (pp. 217-218)
  9. About the Authors
    (pp. 219-222)
  10. Index
    (pp. 223-227)