Innovative Destruction - Structured Finance and Credit Market Reform in the Bubble Era

The combination of unregulated financial innovation and rampant greed had, and continues to have, dire effects on the global economy. The financial crisis, which began in the U.S. subprime housing market, has spread across the globe, decimating the structured finance industry and brought about an unprecedented collapse in the world financial markets. This paper explores the role that structured finance played in the credit crisis, by dissecting the complex instruments which drove the industry and allowed the U.S. subprime housing market meltdown to infect the entire global economy. The author argues that the finance industry is in need of thorough reform and draws on the work of international organizations, governments, and the financial industry to formulate a plan to create a more sustainable financial framework. These proposals target three interrelated areas: 1) the management of financial institutions; 2) the regulation of financial markets, with a specific emphasis on the role of credit rating agencies; and 3) international regulatory coordination. The global financial system as it was has failed the test of time and it is only through meaningful reform and a rethinking of motivations that a stronger and more sustainable global economy can be fostered