Economist’s Corner: Preventing the Next Financial Crisis


Written by Dr. Lynn Reaser
More than a year has now passed following the failure of Lehman Brothers, but we have little assurance that the specter of another collapse of our financial system might not appear on our doorsteps in the future.  Congress and the regulatory agencies are still debating various solutions.
Much of the discussion has focused on a consumer protection agency or limitations on executive bonuses.  While some of these discussions involve important issues, they are largely “sideshows” to what must be addressed.  The heart of the problem involves the following:  How do we prevent the bad decisions of one or two firms from jeopardizing the entire financial system?
Firms making bad choices should be allowed to fail or taken over by the FDIC if insured deposits are at stake.  Financial companies should not be allowed to become so large or important that their existence is essential to the functioning of domestic and global credit markets.  Capital requirements may be the most effective way to limit size and excessive leverage.
Ultimately, companies and investors must be held accountable for the risks they undertake.  No institution should be exempt from that standard.

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