Regulating Financial Markets: Protecting Us from Ourselves and Others
29 Pages Posted: 29 Jan 2009
Date Written: January 28, 2009
The global financial and economic crisis of the late 2000s highlights the ongoing tug-of-war between those who pull toward free markets and those who pull toward strict regulation of markets. It also highlights the sometimes parallel and sometimes perpendicular tug-of-war between those who pull toward libertarianism and those who pull toward paternalism. Rising stock markets and economic prosperity add power to those who pull toward free markets and libertarianism, and stock market crashes and economic recessions add power to those who pull toward strict regulation and paternalism. I discuss the crisis of the late 2000s against the backdrop of earlier crises with special focus on margin regulations which limit leverage, suitability regulations which require providers of financial products to act in the interests of their clients, Blue Sky laws which prohibit securities deemed overly risky or unfair, and mandatory disclosure regulations which require providers of financial products to disclose pertinent information even if potential buyers do not ask for it.
Keywords: regulation, behavioral finance, paternalism, libertarianism, suitability, blue sky, mandatory disclosure, margin, leverage, cognitive errors, emotions
JEL Classification: G21, G22, G23, G24, G28
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