What Caused the Current Financial Mess and What Can We Do about It?

25 Pages Posted: 31 Aug 2009

See all articles by John H. Boyd

John H. Boyd

University of Minnesota - Twin Cities - Carlson School of Management

Ravi Jagannathan

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad

Sungkyu Kwak

Washburn University

Date Written: August 27, 2009

Abstract

In our view, the financial crisis was largely due to wrong incentives affecting the behavior of financial institutions and investors that was set in motion by our government’s reluctance to let large financial institutions fail – i.e., the Too Big to Fail (hereafter, TBTF) policy. Also importantly, bank regulation became essentially ineffective due to the rise of “quasi-banks,” that is, large financial intermediaries that perform banking functions but are not chartered or regulated as banks. In order to prevent the recurrence of such a mess, we argue, the government must identify the quasi-banks and regulate them as banks. It must also credibly convince investors that the TBTF policy is a thing of the past. For that to happen, we call for two major changes in the current structure of financial supervision in the US.

Suggested Citation

Boyd, John H. and Jagannathan, Ravi and Kwak, Sungkyu, What Caused the Current Financial Mess and What Can We Do about It? (August 27, 2009). Available at SSRN: https://ssrn.com/abstract=1463064 or http://dx.doi.org/10.2139/ssrn.1463064

John H. Boyd

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-1834 (Phone)

Ravi Jagannathan (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
429 Andersen Hall
Evanston, IL 60208
United States
847-491-8338 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Sungkyu Kwak

Washburn University ( email )

1700 SW College Ave
Topeka, KS 66621
United States
785-670-1821 (Phone)
785-670-1063 (Fax)

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