The development of an appropriate regulatory response to the global financial crisis

Recurring financial crises are part of the cyclical nature of a free market economy, though what is remarkable is that people often fail to learn from the previous mistakes that cause these crises. One reason for this could be that there has been a relative calm on Main Street which belies the occasional turbulence on Wall Street. Another reason is that people learn the wrong lessons. Thus reserve banks have tended to concentrate on managing inflation and unemployment levels whilst being relatively complacent about the growing risks engendered by sophisticated and risky derivatives that were hidden within the so‐called ‘shadow banking system’.