Preventing the Next Great Meltdown
David A. Levine
Sanford C. Bernstein & Co. (Retired)
November 1, 2010
Capco Institute Journal of Financial Transformation, November 2010
The regulatory framework established during the Great Depression was dismantled in stages after 1969. The deregulation of deposits at banks and savings institutions created incentives to widen the scope of investments that banks and thrifts could make. Novel instruments were created that should have been more carefully regulated but were not. Despite the collapse of the savings and loan industry, which might have (but did not) inspire a period of re-regulation, the pace of innovation increased. The two instruments that produced the Great Meltdown of 2008 – subprime mortgages and credit default swaps – did not begin to grow explosively until several years after the S&L crisis ended. Assuming it is too late to restore in its entirety the pre-1970 regulatory regime, this paper details the kinds of steps that should and can be taken to prevent another system-threatening financial crisis.
Number of Pages in PDF File: 12
Keywords: Subprime, credit default swaps, too big to fail, regulation, deregulation
JEL Classification: E42, E44, E53, G18, G21, G28
Date posted: December 4, 2011
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