Subprime crisis leading to regulation debate

The subprime mortgage financial crisis which saw a huge increase on mortgage foreclosures has sparked debate about the need for greater regulation of the finance sector.

In the 4 February edition of the New Yorker, John Cassidy examines the work of late economist Hyman P. Minsky, who in his “financial-instability hypothesis” identified five stages of the credit cycle: displacement, boom, euphoria, profit taking and panic.

Cassidy says that “Rather than waging old debates about tax cuts versus spending increases, policymakers ought to be discussing how to reform the financial system so that it serves the rest of the economy, instead of feeding off it and destabilising it.”

In the Financial Times Martin Wolf at FT.com / Columnists / Martin Wolf – Why regulators should intervene in bankers’ pay suggests that there is an urgent need for greater disciplines and a more effective regulatory framework for the banking system and says:

No industry has a comparable talent for privatising gains and socialising losses. Participants in no other industry get as self-righteously angry when public officials – particularly central bankers – fail to come at once to their rescue when they get in to (well deserved) trouble.”

“These are the only businesses able to devastate entire economies…….I now fear that the combination of the fragility of the financial system with the huge rewards it generates for insiders will destroy something more important – the political legitimacy of the market economy itself – across the globe. So it is time to start thinking radical thoughts about how to fix the problems.”

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