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Indiana University Bloomington

BEPP

The Kelley Advantage

The department is home to the authors of Managerial Economics and Business Strategy and Games and Information: An Introduction to Game Theory, two of the nation’s leading textbooks in the field.

Research and Publications

Journal Articles

Financial Crisis, Safety Nets and Regulation

2008, Rivista Italiana degli Economisti

Michele U. Fratianni

Abstract

The historical record shows that financial crises are far from being a rare a phenomenon; they occur often enough to be considered part of the workings of finance capitalism.  While there is no single hypothesis that can best explain all crises, the implications of the credit boom-and-bust hypothesis, supplemented with asymmetric information, are consistent with the onset and development of many crises, including the current subprime crisis. Governments have reacted to crises by erecting a vast and growing safety net. In turn, to minimize their risk exposure, they have also put in place expansive systems of regulation and supervision.  The unwinding of the current crisis will mark a big enlargement of the safety net and moral hazard, as well as a predictable flurry of  policy proposals aimed at closing  past regulatory loopholes. The maintained hypothesis is that regulatory and market failures are inexorably intertwined.

Citation

Michele U. Fratianni, "Financial Crises, Safety Nets, and Regulation", Rivista Italiana degli Economisti, 2008, XIII (2): 169-207.

Keywords

bailout, credit, crisis, money, moral hazard, regulation, safety net, subprime