Fallacies of market-friendly financial regulation conducted by the Federal Reserve in the 1990s and 2000s

This article draws from the Minskyian/Post-Keynesian literature on the dynamics of the 21st century capitalism and points to the incompatibility between market-efficiency-based micro-prudential regulatory reforms—conducted by the Federal Reserve System in the 1990s–2000s—and financial system stability. We argue that these reforms rested on a twofold efficiency fallacy: efficient financial markets/regulation-free innovative dynamics and informational transparency seeking market-friendly regulation. Thus, the financial instabilities of the 2000s do not rest on accidental strategies of some irrational individuals but on the liberal regulatory changes implemented in the last decades. This article supplies evidence about the prevalence of this theoretical and policy stance, documenting through speeches and hearings given over the period 1999–2010 by the Fed's officials. We then show that major regulatory changes conducted by the Fed were based on micro-prudential measures consistent with the blind faith of authorities in the capacity of free financial markets to self-regulate. This faith does not seem to be replaced by an alternative objective regulatory approach even in the aftermath of the world-wide 2007–2008 catastrophe. The major conclusion of this study is that a relevant alternative regulation should rest on a macro-prudential approach seeking to deal with the endogenously unstable dynamics of capitalism.