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The crisis of 2008 and financial reform

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  • Werner De Bondt

Abstract

Purpose - The purpose of this paper is to discuss the financial turmoil of 2008 that followed the collapse of the housing bubble in the USA which was the starting point of a global economic crisis. Huge costs are borne by every part of society. Much wealth has been destroyed. Millions of jobs have been lost. The crisis has tarnished faith in free enterprise, in the financial system, and in financial theory. Likely, the era of laissez‐faire capitalism that started during the Reagan‐Thatcher years is ending. We are entering a period of profound uncertainty. It is imperative that the moral dimension of capitalism be restored. Design/methodology/approach - The paper is based on a review of theory and historical evidence relating to financial bubbles and financial regulation. Findings - The author offers suggestions on how to rebuild the global financial system. We need: a systemic risk regulator, independent from business and political influence; higher capital requirements for all systemically significant financial service firms; restrictions on proprietary trading in commercial banks; transparency in derivatives; new ways to compensate bankers that reduce the incentive to take excessive risks; consumer protection against defective financial products; and the re‐establishment of the principle of fiduciary duty. Practical implications - The paper lists practical suggestions on how to reform the global financial system. Social implications - Economic success is based on trust. After the 2008 crisis, regulatory reform is the best way to rebuild trust in the financial system. Originality/value - The paper offers a unique perspective based in part on insights drawn from behavioral finance.

Suggested Citation

  • Werner De Bondt, 2010. "The crisis of 2008 and financial reform," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 2(3), pages 137-156, October.
    • Handle: RePEc:eme:qrfmpp:v:2:y:2010:i:3:p:137-156
    DOI: 10.1108/17554171011091728
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    References listed on IDEAS

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    1. Calomiris,Charles W., 2000. "U.S. Bank Deregulation in Historical Perspective," Cambridge Books, Cambridge University Press, number 9780521583626, November.
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    Cited by:

    1. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
    2. Kornai, János, 2014. "Bevezetés A puha költségvetési korlát című kötethez [Introduction to the author s volume entitled Soft Budget Constraint]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 845-897.
    3. Nadezda Gulko & Catriona Hyde & Nina Seppala, 2017. "Disclosure of corporate risks and governance before, during and after the global financial crisis: case study in the UK construction industry in 2006–2009," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 14(3), pages 207-223, August.
    4. Lim, Chu Yeong & Woods, Margaret & Humphrey, Christopher & Seow, Jean Lin, 2017. "The paradoxes of risk management in the banking sector," The British Accounting Review, Elsevier, vol. 49(1), pages 75-90.

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