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Why the Conventional Wisdom about the 2008 Financial Crisis Is Still Wrong: Ten Years Later

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Much of what has been heard, read, or taught about the 2008 financial crisis is incorrect. It was not caused by free market capitalism run amok. The crisis was not created by deregulatory zeal. It wasnt primarily due to greed on Wall Street. The crisis was not simply created by peoples irrational exuberance or animal spirits. Perhaps most importantly, it did not require ba Much of what has been heard, read, or taught about the 2008 financial crisis is incorrect. It was not caused by free market capitalism run amok. The crisis was not created by deregulatory zeal. It wasnt primarily due to greed on Wall Street. The crisis was not simply created by peoples irrational exuberance or animal spirits. Perhaps most importantly, it did not require bailouts and thousands of pages of new regulations to fix. Instead, it came about because of significant market distortions created by government subsidies, misregulation, and perverse incentives. The conventional wisdom blames unbridled markets for mortgage fraud, imprudent risks, and extreme leverage in financial institutions. Policy makers told us that the failure of Lehman Brothers, and the near failure of American International Group and many large banks, would have resulted in catastrophic decline and perhaps another Great Depression. After the crisis, thousands of pages of new regulations were written to limit the types of risk banks can take and the kinds of investments they can make so that a financial crisis of this magnitude cant happen again. But what if this conventional wisdom was wrong? If the problem wasnt unregulated, unrestrained markets leading to fraud and excessive risk-taking, if instead it was perverted incentives and distorted market signals due to numerous regulations and mandates in the first place, then the thousands of new pages of regulations havent solved the fundamental problem. In fact, they have made it worse. This book shows that it is time to reassess the conventional wisdom. Perhaps there is still time to reverse the faulty solutions based upon it before another financial crisis breaks out.


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Much of what has been heard, read, or taught about the 2008 financial crisis is incorrect. It was not caused by free market capitalism run amok. The crisis was not created by deregulatory zeal. It wasnt primarily due to greed on Wall Street. The crisis was not simply created by peoples irrational exuberance or animal spirits. Perhaps most importantly, it did not require ba Much of what has been heard, read, or taught about the 2008 financial crisis is incorrect. It was not caused by free market capitalism run amok. The crisis was not created by deregulatory zeal. It wasnt primarily due to greed on Wall Street. The crisis was not simply created by peoples irrational exuberance or animal spirits. Perhaps most importantly, it did not require bailouts and thousands of pages of new regulations to fix. Instead, it came about because of significant market distortions created by government subsidies, misregulation, and perverse incentives. The conventional wisdom blames unbridled markets for mortgage fraud, imprudent risks, and extreme leverage in financial institutions. Policy makers told us that the failure of Lehman Brothers, and the near failure of American International Group and many large banks, would have resulted in catastrophic decline and perhaps another Great Depression. After the crisis, thousands of pages of new regulations were written to limit the types of risk banks can take and the kinds of investments they can make so that a financial crisis of this magnitude cant happen again. But what if this conventional wisdom was wrong? If the problem wasnt unregulated, unrestrained markets leading to fraud and excessive risk-taking, if instead it was perverted incentives and distorted market signals due to numerous regulations and mandates in the first place, then the thousands of new pages of regulations havent solved the fundamental problem. In fact, they have made it worse. This book shows that it is time to reassess the conventional wisdom. Perhaps there is still time to reverse the faulty solutions based upon it before another financial crisis breaks out.

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