Financial Crises: Cases of Market Failure

The quotation above sums up the purpose of this chapter. In Chapter 1 we described differences between financial and commodity markets. Chapter 2 discussed theories of market and government failures. This chapter shows that failures in private banking occur in the same way (and often for the same reasons) as do government failures. The factors contributing to the collapse of many financial agencies were precisely the absence of appropriate mechanisms of control and supervision, poor-quality management, lack of accountability, absence of clear goals and strategy, and a failure to terminate an unsuccessful activity despite frequent warnings (equivalent to consumer response à la Wolf) — factors commonly attributed to non-market failures.