Beyond Macro-Prudential Regulation: Three Ways of Thinking About Financial Crisis, Regulation and Reform

The Journal of Global Policy, Vol. 3, Issue 4, p. 410

Columbia Law and Economics Working Paper No. 411

24 Pages Posted: 19 Nov 2011 Last revised: 17 Jan 2013

Tamara Lothian

Columbia University - Center for Law and Economic Studies

Date Written: November 17, 2011

Abstract

This paper considers the debate about the "macro-prudential regulation" of finance in the context of a broader view of the relation of finance to the real economy. Five ideas are central to the argument. The first idea is that the two dominant families of ideas about finance and its regulation share a failure of institutional imagination. Neoclassical economists blame localized market and regulatory failures for the troubles of finance. Keynesians invoke the way in which the money economy may amplify cycles of despondency and euphoria. Neither current of thought recognizes that the institutions of finance in particular, and of the market economy in general, can take different forms, with different consequences for the organization of production and exchange as well as for distribution. The second idea is that, under present arrangements, finance readily becomes the master rather than the servant of the real economy and lays itself open to recurrent booms and busts. The third idea is that present arrangements can be reformed in ways that more effectively put finance at the service of the productive agenda of society. The fourth idea is that the regulation of finance, including what we now call macro-prudential regulation, can and should be designed as initial moves in such an institutional reshaping. The fifth idea is that neoclassical and Keynesian conceptions are inadequate guides to the execution of this task. We can find in law and legal thought many of the intellectual and practical tools that we need.

Keywords: financial crisis, financial regulation, shadow banking, bank regulation, Dodd-Frank Act, systemic risk, too big to fail, law and finance, financial deepening, the real economy, comparative law, institutional analysis, structural reform

JEL Classification: G1, G2, G24, G28, K22, K23

Suggested Citation

Lothian, Tamara, Beyond Macro-Prudential Regulation: Three Ways of Thinking About Financial Crisis, Regulation and Reform (November 17, 2011). The Journal of Global Policy, Vol. 3, Issue 4, p. 410; Columbia Law and Economics Working Paper No. 411. Available at SSRN: https://ssrn.com/abstract=1961369 or http://dx.doi.org/10.2139/ssrn.1961369

Tamara Lothian (Contact Author)

Columbia University - Center for Law and Economic Studies ( email )

435 W. 116th Street Box A-22A
New York, NY 10027
United States

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