Economics
Government regulations may have played a role in the creation of the crisis, but there were many causes of the crisis and indeed many different negative outcomes. The credit crisis in particular occurred when the financial system began to collapse under the weight of bad assets that had been purchased under the assumption that they were AAA quality. This calls to account three areas where added regulation could have at least mitigated the fallout from the credit crisis.
The first set of regulations would have been with respect to leverage in the banking system. Too many banks carried too much leverage, mainly in their investment banking operations. As a result, when the bottom fell out of the MBS market, these banks developed solvency problems. As a general rule, banks that did not take on too much debt did not have solvency problems, and would have been able to keep lending. Naturally, the market system is supposed to discourage bankers from making such gambles in the first place, but successive government bailouts have taught the industry that the shareholders and executives need not suffer in the event of solvency problems.
The second set of regulations has to do with bank ownership. American banks struggled because some became too big. They bought investment banking operations that became too great a share of the size of the bank as well. Thus, when some banks began to fail, the sector lacked sufficient diversity to withstand the shock, and most banks were exposed to the same products. In countries where tight restrictions exist on bank mergers and bank ownership -- Canada and Australia have been frequently cited -- there was no credit crisis.
Lastly, regulation on the activities of rating agencies would have helped. These agencies for some reason handed out AAA ratings to securities that were tied to the broad real estate market, not considering the possibility of systemic failure or downturn -- this is an industry known to be cyclical. There was simply no oversight of the ratings agencies, and since they operate in a three-firm oligopoly it is difficult for them to be removed from their positions, even when they make catastrophic errors in judgment.
2. a. By definition, "too much" and "too little" are inadequate in some way. With respect to the greater good, both have problems. Too much regulation...
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