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Preventing the Next Great Meltdown

Capco Institute Journal of Financial Transformation, November 2010

12 Pages Posted: 4 Dec 2011  

David A. Levine

Sanford C. Bernstein & Co. (Retired)

Date Written: November 1, 2010

Abstract

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.

Keywords: Subprime, credit default swaps, too big to fail, regulation, deregulation

JEL Classification: E42, E44, E53, G18, G21, G28

Suggested Citation

Levine, David A., Preventing the Next Great Meltdown (November 1, 2010). Capco Institute Journal of Financial Transformation, November 2010. Available at SSRN: https://ssrn.com/abstract=1967681

David A. Levine (Contact Author)

Sanford C. Bernstein & Co. (Retired) ( email )

New York, NY 10105
United States

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