It is now clear that we are in the midst of the worst financial crisis since the Great Depression. This crisis is the latest phase of the evolution of financial markets under the radical financial deregulation process that began in the late 1970s. This evolution has taken the form of cycles in which deregulation, accompanied by rapid financial innovation, stimulates powerful financial booms that end in crises. Governments respond to crises with bailouts that allow new expansions to begin. As a result, financial markets have become ever larger and financial crises have become more threatening to society, which forces governments to enact ever larger bailouts. In this Working Paper, James Crotty and Gerald Epstein analyze a series of structural flaws in the current financial system that helped bring on the current crisis, and propose a nine point regulation policy designed to end this destructive dynamic.

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Wall Street was recently sent begging for government life support. Unfortunately, we needed to acquiesce to avoid another 1930s-style Depression. But Wall Street has to accept in return a revived regulatory system that would promote financial stability and the well-being of the majority. In this article for The Nation, Robert Pollin lays out four observations and proposals for sane regulation, intended to apply to all U.S. financial markets and institutions, whether banks, holding companies, hedge funds or variations thereof.

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In this PERI Working Paper, James Crotty argues that the ultimate cause of the current global financial crisis is to be found in the deeply flawed institutions and practices of the New Financial Architecture (NFA) – a globally integrated system of giant bank conglomerates and the so-called ‘shadow banking system’ of investment banks, hedge funds and bank-created Special Investment Vehicles. These institutions are either lightly and badly regulated or not regulated at all, an arrangement defended by and celebrated in the theory of efficient capital markets. The NFA has generated a series of ever-bigger financial crises that have been met by larger and larger government bailouts.

Crotty analyzes the structural flaws of the NFA, an understanding of which is a necessary step toward the creation of a new and improved set of financial institutions and practices likely to achieve core policy objectives such as faster real sector growth with lower inequality.

>> Download "Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture'"