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Ben Chu: It's the incentives, stupid

Posted by Eagle Eye
  • Tuesday, 17 November 2009 at 02:31 pm
Steve Randy Waldman, who writes the blog interfluidity, has produced a brilliantly compelling analysis of how and why the US financial regulatory system failed - and why it is likely to fail again under the present reform proposals. He's writing about the American system, but the lessons apply equally to Britain.

It’s an analysis which explains a great deal about what has happened in recent years, from the failure of regulators to rein in banks during the credit boom, to the authorities' decision to bail them out without imposing meaningful reform.

It also contains another strong argument for splitting up the giant banks (regulators are more likely to take "prompt corrective action" against smaller banks with diminished lobbying power).

You cannot hope to understand how this financial crisis occurred without understanding the incentives throughout the system - and the incentives acting on regulators just as much as bankers. Waldman nails them.
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