Donald J. Boudreaux is Professor of Economics at George Mason University in Fairfax, Virginia. He was the Chairman of the Department of Economics from August 2001 to August 2009. Previously, he was president of the Foundation for Economic Education (1997-2001); Associate Professor of Legal Studies and Economics at Clemson University (1992-1997); and Assistant Professor of Economics at George Mason University (1985-1989).

Bryan Caplan is an associate professor at George Mason University, and the author of <em>The Myth of the Rational Voter: Why Democracies Choose Bad Policies</em>. His research interests include public economics.

The Great Recession (or the Great Hangover) that began in 2008 did not have to happen. Its causes and consequences are not mysterious. Indeed, this particular and very painful episode affirms what the best nonpartisan economists have tried to tell our politicians and policy-makers for decades, namely, that the more they try to inflate and direct the economy, the more damage the rest of us will suffer sooner or later.

This paper looks at the roots of the current crisis through an analytical framework of bad bets, excessive leverage, domino effects, and 21st-century bank runs. It shows that broad policy areas—including housing policy, capital regulations for banks, industry structure and competition, autonomous financial innovation, and monetary policy—affected elements of this framework to varying, but important degrees. Ultimately, this special study seeks to draw meaningful lessons for policymakers by understanding the complex history, evolution, and integrated nature of financial regulations.

The recent financial crisis has provoked a raft of contending claims as to whether the cause of the crisis is better attributed to market failure or political failure. Such claims are predicated on a presumption that markets and polities are meaningfully separate entities. To the contrary, we argue that contemporary…

In light of the 2007-2008 financial crisis, policymakers are reforming financial regulations in order to create a resolution system for large failing financial institutions. This paper advocates that speed bankruptcy, specifically overnight debt-to-equity conversions be considered as a viable option to recapitalize troubled financial institutions. At the very least, overnight debt-to-equity conversions could have been used to provide hundreds of billions of dollars of extra equity to weak firms in 2008, and could still be used the next time a firm that is ostensibly “too big to fail” comes close to going bust.

This chart compares Congressional Budget Office long-term projections of the debt held by the public from 2010 with long-term projections calculated in 2007.

This chart by Veronique de Rugy illustrates the Congressional Budget Office’s long-term baseline projections of federal spending.

Policymakers continue to seek viable alternatives to resolve large insolvent financial institutions. A better option is speed bankruptcy: a process of converting some long-term debt into equity, a more palatable option than using taxpayer funds to recapitalize large banks.

As part of a broad legislative effort to regulate hedge funds, Congress has introduced a bill that would require hedge funds to register with the SEC and comply with new record keeping and disclosure requirements. A much more effective method of regulating hedge funds would be to institute a strategy which effectively encourages markets to self-police by instituting financial regulatory policies that support self-regulation of hedge funds.

In this testimony, Professor Verret notes that current law being considered, H.R. 4537, attempts to contort the securities laws to regulate campaign finance risking and limiting the ability of companies to communicate with legislators by giving special interest institutional shareholders, such as unions, power to stop those communications. This bill does not limit union political spending in any way and has nothing to do with the investor protection goals of the Securities Exchange Act.

During the financial crisis of 2008, the federal government used taxpayer funds through the Troubled Assets Relief Program (TARP) to buy shares in private firms. In his testimony, Prof. J.W. Verret speaks to the possibility of how government ownership of private firms can pervert the accountability of both government and business.

Jerry Ellig presents before the Department of Energy, Office of Health, Safety and Security in the Visiting Speakers Program about regulation in high reliability organizations, such as telecommunications, airport security and finance.