Incentive-Robust Financial Reform (Company Overview‪)‬

"Will Rogers, commenting on the Depression, famously quipped: "If stupidity got us into this mess, why can't it get us out?" Rogers's rhetorical question has an obvious answer: persistent stupidity fails to recognize prior errors and, therefore, does not correct them. For three decades, many financial economists have been arguing that there are deep flaws in the financial policies of the U.S. government that account for the systemic fragility of our financial system, especially the government's subsidization of risk in housing finance and its ineffective approach to prudential banking regulation. To avoid continuing to make the same mistakes, it would be helpful to reflect on the history of crises and government policy over the past three decades. The U.S. banking crises of the 1980s--which included the nationwide S&L crisis of 1979-91, the 1986-91 commercial real estate banking crisis (Boyd and Gertler 1993), the LDC debt crisis primarily afflicting money-center banks from 1979 to 1991, the farm credit crisis of the mid-1980s (Calomiris, Hubbard, and Stock 1986; Carey 1990), and the post-1982 Texas and Oklahoma banking crisis (Horvitz 1992)--were disruptive and pervasive. The resolution costs of the thrift failures alone amounted to about 3 percent of U.S. GDP. And, "large" troubled financial institutions (e.g., Continental Illinois Bank--actually a bank of moderate size and insignificant affairs--Citibank, and Fannie Mae) were either explicitly bailed out by the government or allowed to survive despite their apparent fundamental insolvency.