Securitization, the Global Financial Crisis, and the New Regulatory World

In regulating securitization, the prescription depends on the diagnosis, and such diagnosis requires on an assessment of the GFC. Unfortunately, identifying the exact mechanisms that led to both the pre-GFC bubble and the GFC itself is far from easy. In the first instance, with only one sample point, it is impossible to control for the myriad factors accused of causing or exacerbating the crisis. Economic theory is of little help in most financial issues, as orthodox economics has little place for finance other than in the efficient form, and it is not easy to incorporate micro inefficiencies into a larger model of crisis. There are of course strong ideological biases present in almost all commentators, and many have pre-conceived normative ideals and/or vested interests in the outcome of the debate. As such, rhetoric and discourse generally make up for a lack of provable facts. Free market advocates interpret the crisis to be caused primarily by gov-ernment and/or regulatory failure, and therefore market participants such as the GSEs had little choice but to follow perverse incentives. Others such as Joe Stiglitz agree that regulatory failure was important, but that this was caused by both a lack of will on the part of policy makers to make policy that might prevent the free market from functioning and on under-resourced and unmoti-vated regulators not enforcing the rules that did exist.