What Made the Financial Crisis Systemic?

From The CATO Institute:

Monetary Policy/Financial Regulation

What Made the Financial Crisis Systemic?

by Patric H. Hendershott, Kevin Villani

Cato Institute

March 06, 2012

Policy Analysis

Markets can become unbalanced, but they generally correct themselves before crises become systemic. Because of the accumulation of past political reactions to previous crises, this did not occur with the most recent crisis. Public enterprises had crowded out private enterprises, and public protection and the associated prudential regulation had trumped market discipline. Prudential regulation created moral hazard and public protection invited mission regulation, both of which undermined prudential regulation itself. This eventually led to systemic failure. Politicians are responsible for both regulatory incompetence and mission-induced laxity.

URL: www.cato.org/pubs/pas/PA693.pdf