Name some important lessons learned from the financial crisis.

Question

What will be an ideal response?

Answer 1

1. Most observers believe that financial regulation was too lax prior to the crisis; regulators did not properly perform their functions.2. These regulatory failures extended well beyond poor job performance by regulatory personnel. The crisis made it painfully clear that there were myriad weaknesses in the regulatory structure. As a result, Congress set out to rewrite many of the laws governing financial regulation and passed the Dodd-Frank Act of 2090. Governments in other countries undertook similar tasks.3. Virtually everyone agrees that we allowed the financial system to operate with far too much leverage. Partly, excessive leverage can be traced to lax regulation and inadequate laws, but a great deal reflects poor business (and household) judgments.4. Excessive complexity and opacity in the securities markets can make a financial system fragile, even dangerous.5. The previous consensus view—that the job of stabilizing aggregate demand should be assigned to monetary policy, not to fiscal policy—is no longer the consensus. Despite its arsenal of weapons for reviving the moribund economy in 2008–2009, the Fed found that it needed the help of the President and Congress. It looks as if the expansionary fiscal policy really worked in 2008 and 2009, helping to shorten and moderate the Great Recession.6. Expansionary monetary policy is not necessarily finished once the Fed reduces the federal funds rate to zero. A number of unconventional monetary policies were adopted and proved effective.7. The business cycle is by no means dead. Each time our economy enjoys a lengthy period without serious recessions, some analysts speak of the death of the business cycle, but let us paraphrase Mark Twain that the reports of its death have been greatly exaggerated. It is very much alive.