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Financial regulation is often described as a swinging pendulum. A crisis occurs, and some number of years are spent crafting reforms to prevent another crisis from striking. Unfortunately, all too aware of the enormous costs of the recent disruption, policymakers go too far, stifling salutary financial activity and slowing economic growth. As memories fade, policymakers become increasingly focused on the costs of regulation. Stability is taken for granted, and restrictions are loosened. Markets stay stable and retrenchment continues. Regrettably, however, policymakers err again, and to our collective shock and horror, another crisis hits and the cycle repeats.

If this model were accurate, we should all stop trying to reform the financial system and devote ourselves to minimizing the harms of the intermittent calamities. But it’s not. Panics are not inevitable market phenomena. They are man-made, a by-product of the multifaceted legal regime enabling complex financial activity to occur over time. This regime includes laws governing property, contracts, and incorporation, as well as laws conferring upon certain entities the right to issue deposits, laws restricting the activities of these entities (banks), and laws providing assurances to others that the government will stand behind them (e.g., as the lender of last resort).


Banking and Finance Law | Law


Reprinted with permission by the Vanderbilt Law Review En Banc.