After the Fall: Saving Capitalism from Wall Street and WashingtonRobust financial markets support capitalism, they don't imperil it. But in 2008, Washington policymakers were compelled to replace private risk-takers in the financial system with government capital so that money and credit flows wouldn't stop, precipitating a depression. Washington's actions weren't the start of government distortions in the financial industry, Nicole Gelinas writes, but the natural result of 25 years' worth of such distortions. In the early eighties, modern finance began to escape reasonable regulations, including the most important regulation of all, that of the marketplace. The government gradually adopted a "too big to fail" policy for the largest or most complex financial companies, saving lenders to failing firms from losses. As a result, these companies became impervious to the vital market discipline that the threat of loss provides. Adding to the problem, Wall Street created financial instruments that escaped other reasonable limits, including gentle constraints on speculative borrowing and requirements for the disclosure of important facts. The financial industry eventually posed an untenable risk to the economy -- a risk that culminated in the trillions of dollars' worth of government bailouts and guarantees that Washington scrambled starting in late 2008. Even as banks and markets seem to heal, lenders to financial companies continue to understand that the government would protect them in the future if necessary. This implicit guarantee harms economic growth, because it forces good companies to compete against bad. History and recent events make clear what Washington must do. First, policymakers must reintroduce market discipline to the financial world. They can do so by re-creating a credible, consistent way in which big financial companies can fail, with lenders taking their warranted losses. Second, policymakers can reapply prudent financial regulations so that markets, and the economy, can better withstand inevitable excesses of optimism and pessimism. Sensible regulations have worked well in the past and can work well again. As Gelinas explains in this richly detailed book, adequate regulation of financial firms and markets is a prerequisite for free-market capitalism -- not a barrier to it. |
Other editions - View all
After the Fall: Saving Capitalism from Wall Street--and Washington Nicole Gelinas Limited preview - 2009 |
After the Fall: Saving Capitalism from Wall Street--and Washington Nicole Gelinas No preview available - 2011 |
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Alan Greenspan American assets bailout bank’s bankers bankruptcy Bear Stearns big banks big to fail billion borrowing bubble buyers cash cial Citigroup collapse commercial banks companies company’s confidence Congress Continental Illinois Continental’s corporate created credit derivatives credit-default crisis debt decades default depositors deposits Depression-era disclosure dollars early economy Enron failure Fannie and Freddie FDIC Federal Reserve financial firms financial industry financial institutions financial markets financial system financial world firm’s global government’s Greenspan guarantee hedge fund innovation Insull interest rates investment banks investors J. P. Morgan junk bonds Lehman lending loans Long-Term Capital Management losses ment models money-market funds mortgage mortgage securities mortgage-backed securities nation panic percent policymakers profits protect purchase regulators regulatory requirements rescue securities firms securities market securitization sell short-term lenders speculative tion too-big-to-fail trading tranches Treasury trillion uninsured unregulated derivatives Wall Street Journal Washington worried York