The global financial crisis is rightly prompting calls for a rethink of how we regulate financial institutions and markets. Most such calls are focused on what might be called “fail-safe” regulations, designed to reduce the risk that institutions will make reckless lending and investment decisions. Even libertarian-leaning policymakers and thinkers, such as Alan Greenspan, are now concerned with the capacity of our globally connected financial system to spread failures of risk management from one institution to another.
Given the unprecedented credit market turmoil and central bank interventions of recent days, the US government’s mammoth $700bn Troubled Asset Relief Program (TARP), approved with great haste and huge expectations just a few days prior, is already looking like a sideshow. If the Federal Reserve is to return to being a lender of last resort, […]