The global financial crisis: Causes and cures

Abstract

The massive financial instability of 2007-08 was, in the main, the result of lax monetary policy. Regulation compounded this error by allowing and encouraging excessive leverage and maturity transformation by banks. Innovation did contribute to reckless credit expansion and investments, but without lax money and excessive leverage, reckless bets on asset price increases would not have been possible. Therefore, a repeat of this instability could be avoided by correcting these two policy faults. There is no need for intrusive rules constraining non-bank intermediaries and financial innovation. The main message is: keep it simple.