Working Paper

Financial Reform Is Working, But Deregulation That Incentivizes One-Way Bets Is Sowing the Seeds of Another Catastrophic Financial Crash

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The deregulatory zeal of the 1990s and 2000s has returned to the US and the post-Brexit plans to protect the City in the UK sound like the pre-crash light-touch mentality that fueled global regulatory arbitrage.  As a result, a foremost “challenge of our time” is to stop “subsidizing more one-way bets” and “doubling down on failure.”

However, rather than a “reawakening,” too many signs point to a willed (or, often, purchased) amnesia:  an increasingly deregulated and unregulated financial sector that looks a lot like 2004-2005 with nothing but ideological or self-interested claims that a crash like 2008 won’t again follow.  The result is incentivizing and subsidizing one-way bets, which guarantees another spectacular and costly failure.