Lessons from the Global Financial Crisis (Or Why Capital Structure Is Too Important to Be Left to Regulation)

Given the likelihood of periodic financial crises, much of the focus of policymakers should be on the proper response to rather than the prevention of crises. In this article, the authors begin by repeating Walter Bagehot's famous prescription for resolving financial trouble in the 19thcentury London money market: flood the system with liquidity and do all that can be done to keep the capital markets open and functioning. Although this message was disastrously ignored by the Federal Reserve Bank of 1929-33, Bagehot's advice was well understood by the Fed and U.S. Treasury in managing the crisis of 2008. Copyright Copyright (c) 2010 Morgan Stanley.