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HOW POLICY REFORM LED TO THE FINANCIAL CRISIS

This paper looks at the roots of the current crisis through an analytical framework of bad bets, excessive leverage, domino effects, and 21st-century bank runs. The paper shows that broad policy areas-including housing policy, capital regulations for banks, industry structure and competition, autonomous financial innovation, and monetary policy-affected elements of this framework to varying, but important, degrees. While considering alternative points of view concerning the causes of the financial crisis, the paper concludes that bank capital regulations were the most important causal factor in the crisis and that the policy “solutions” to previous financial and economic crises sowed the seeds for this current crisis.



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