Systemic Failure in US Capital Markets: Lessons Not Learned

Abstract

Existing intellectual frameworks for the financial stability that leads to prosperity could have prevented the systemic failure that led to the 2008 collapse of global capital markets. This analytical article demonstrates the point by applying two well known frameworks to financial regulation in the US. This approach provides a characterization of the relationship between financial infrastructure and financial market stability that is well aligned with existing theory about stable financial systems. The author finds that the United States failed to provide a systemically prudent framework in any of the primary policy areas identified by Barth et al. (2004) through their analysis of World Bank surveys. Further, US financial regulators failed to fulfill the key tasks identified by Eatwell (2001) in a comprehensive examination of the regulatory factors that contribute to financial stability. The author concludes that economically efficient specialization in financial services would release economic gains from comparative advantage.

Keywords

• capital markets
• economic development
• financial regulation
• globalization
• international debt crisis